Opposition States Ask for Compensation to Cover GST Losses After GST Reform
The Central Government had earlier proposed to introduce a two-rate GST system. At present, the GST system has 4 rates: 5%, 12%, 18%, and 28%, along with an additional cess on some goods. The Centre is proposing to have only two rates: 5% and 18%, with a 40% extra tax for sin goods and luxurious goods.
The Finance Ministers from eight states, including Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana, and West Bengal, have agreed that the central government’s new plan to change the GST rate could result in a revenue loss of around Rs 1.5 crore to 2 trillion. They have decided that they will present this proposal at the next GST Council meeting on September 3 and 4, 2025.
The finance ministers are now demanding the Central government to compensate for this possible loss. To avoid the revenue loss while still changing the GST rates, they suggest imposing an extra tax on luxury and sin goods along with the proposed 40% tax rate.
In their proposal, the states suggested that if there is still a deficit even after applying the proposed extra tax on sin and luxury goods, the central government should raise secured loans against the future receipts from that extra tax.
After a meeting of these states, the Karnataka Finance Minister Krishna Byre Gowda stated that the proceeds from the new levy should be distributed among states. He estimated that each state may lose 15% to 20% of its present GST revenue due to this change. He warned that this loss in revenue can cause serious damage to the financial stability of the state government in the country. He has asked the central government to compensate the state for the next five years until the effect of the change in GST rate stabilises.
The Karnataka Finance Minister also warned that the revenue loss can have a major impact on the public as well as the development work and could weaken the financial independence of states. He said that the states must be protected from the negative impacts of losing revenue under the new GST system.
Many other Finance Ministers, including Harpal Singh Cheema, have also demanded that the government should introduce a system to check profiteering, ensuring that any benefits from changes in GST rates actually reach the common people.
The eight opposition-ruled states also asked that 2024-25 be used as the base year for calculating revenue protection.
