The GST Council will meet soon to discuss the next generation of reforms, aimed at simplifying tax rates, reducing slabs, and making life easier for consumers and businesses.
Lower taxes could mean cheaper goods, more spending, and a much-needed boost to the economy. But on the flip side, states that rely heavily on GST could face serious revenue shortfalls.
SBI and Ambit Capital estimate that the combined loss for the Centre and states could be anywhere from Rs 70,000 crore to Rs 1.8 lakh crore a year.
Ambit Capital calls it a deliberate “fiscal stimulus”—a second boost after recent income tax cuts. “GST rate cuts are a more potent stimulus than income tax reductions. If price drops reach consumers without the government cutting spending, GDP could rise by 20–50 basis points,” the report says.
But not every state will feel the pain the same way.
WHICH STATES WILL FEEL THE HEAT?
Sundeep Gupta, Partner at Baker Tilly ASA India LLP, notes that consumption-driven states such as Karnataka and Tamil Nadu could stand to benefit. “But debt-heavy states like Punjab, Bihar, and West Bengal face serious stress. More than 40% of their tax revenue comes from GST, so any disruption is tough. Maharashtra, with its large deficits, may see short-term gaps. Success depends on how well the Centre cushions vulnerable states,” he added.
Karthik Mani, Partner–Indirect Tax at BDO India, echoes this concern and adds another layer: “While the rate reduction would lead to revenue shortfalls for all the states, since the rate cut is likely to be more focused on items for day-to-day consumption, the major impact would be on states with high consumption such as UP, Bihar, Maharashtra, and Gujarat, which, by virtue of their large populations, have significant spending.”
Maharashtra, Karnataka, Gujarat, Tamil Nadu, and Haryana—India’s biggest GST contributors—could see the largest absolute revenue drops. Meanwhile, Kerala, Punjab, Uttarakhand, and Himachal Pradesh may feel the pinch proportionally more, as GST makes up 30–40% of their tax income.
And the timing couldn’t be worse: the GST compensation cess is likely to end in October. Originally meant to shield states from revenue loss, it’s now being used to repay Covid-era loans.
Without it, some states may have to find other ways to fill the gap.
So, how will they cope?
“The states have a challenge on their hands now to recoup the revenue losses and the hope is to rely on the boost to consumption as a result of the rate cuts. They may expect compensatory revenue through the proposed 40% tax slab for sin goods,” explains Mani.
“States are also likely to keep strong vigilance to identify any tax leakages. Lastly, for improving tax revenues, they may consider increasing taxes on fuels and liquor to offset part of the revenue losses.”
WHAT IF SOME STATES PUSH BACK?
The upcoming GST Council meeting on September 3–4 will be crucial. Some states may oppose the proposed rate cuts or demand additional compensation, especially those heavily reliant on GST revenue. The GST Council votes on a weighted system: the Centre’s vote counts for one-third, and all the states combined hold two-thirds. A proposal needs at least 75% of the total weighted votes to pass.
This means the Council can technically pass proposals even if some states disagree, as long as the Centre and enough supporting states make up the required majority.
But if key states oppose and the Centre does not back the proposal, it cannot pass. In other words, consensus is critical. Without it, the rollout of GST 2.0 could be delayed, creating uncertainty for businesses and consumers alike.
