As states step up their protest over shrinking Goods and Services Tax (GST) revenues, the debate over the Centre’s flagship tax reform has sharpened ahead of the 56th GST Council meeting on September 3 and 4.
Finance ministers from Kerala, Jharkhand, Tamil Nadu, Karnataka, Telangana, Punjab, Himachal Pradesh, and West Bengal have flagged steep revenue shortfalls, warning that repeated tax cuts and exemptions are eroding their fiscal space.
But an SBI Research report has said that states will remain net gainers from the Goods and Services Tax (GST), even after exemptions and rate rationalisation. Let’s dive deeper.
States flag shortfall
A few days ago, finance ministers from the eight states supported the proposal to rationalise GST rates but urged the government to safeguard state revenues.
Kerala Finance Minister KN Balagopal stated that states had collectively lost approximately ₹22,000 crore compared to pre-GST levels. Punjab’s Harpal Singh Cheema pegged his state’s revenue losses at ₹1.11 lakh crore over eight years, adding that revenues had fallen by nearly 25% since GST’s rollout.
Karnataka Revenue Minister Krishna Byre Gowda argued that 71% of the revenue loss was borne by states, while the Centre had other tax sources to lean on.
The states proposed replacing the GST compensation cess with a temporary additional levy on sin goods—bridging the gap between the existing 40% rate and higher slabs—for five years or until revenues stabilise.
SBI’s counterpoint
SBI Research, however, contends that the GST structure itself protects state revenues. Under the current arrangement, states receive 50% of collections directly and also get 41% of the Centre’s share through tax devolution.
This means that out of every ₹100 collected, states end up with about ₹70.5.
SBI projects that in FY26, states could garner at least ₹10 lakh crore as State GST (SGST) and another ₹4.1 lakh crore through devolution.
Even after exemptions or rationalisation, higher consumption and better compliance could generate an additional ₹52,000 crore, to be equally shared between the Centre and states.
The report also cited past trends.
In 2018 and 2019, GST rate cuts initially caused a 3-4% dip in monthly collections, but revenues quickly rebounded, growing 5-6% month-on-month.
According to SBI, the framework of fiscal federalism ensures that states are not fiscally disadvantaged, even in the face of exemptions or rationalisation.
