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Informist, Friday, Aug. 29, 2025

 

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--Karnataka minister: See effective GST rate falling below 10% post rejig 
--Karnataka minister: Propose additional levy over GST on sin goods 
--Karnataka minister:Seek compensation for potential loss from GST rate cuts 
--Karnataka minister: All Opposition states agreed to GST rate cut 
--Opposition states: Centre must assure compensation for at least 5 yrs 
--Opposition states: Centre must borrow to balance revenue loss from GST cut 
--Opposition states: Propose extra levy mop-up to be fully given to states 
--Opposition states seek compensation cess-like mechanism vs GST revenue loss 
--Opposition states: Seek extra levy on sin goods over proposed 40% GST rate 
--Opposition states: See 15-20% revenue fall from proposed GST rate cut
--Himachal Pradesh minister: GST rate cut should not lead to profiteering

 

NEW DELHI – The Opposition-ruled states led by Karnataka held a meeting on Friday to assess the impact of proposed reforms in the goods and services tax. These states proposed that the revenue garnered by an additional levy over and above the proposed 40% rate on sin and luxury goods must be distributed among them to prevent them from any revenue shortfall.

 

"There was a cess, the cess can be replaced by an additional levy so that additional levy can be used to compensate states," Krishna Byre Gowda, the minister for revenue department of Karnataka, said at a press conference after the meeting. "Compensation should be assured for a minimum of five years, beyond which it may be reviewed based on GST buoyancy," the states said in their proposal to the GST Council. Protection should be granted at the rate of 14% per annum, the proposal said.

 

"The Union should raise loans to compensate the balance revenue loss of States (both due to rate rationalisation and loss of compensation cess) and repay the same through extension of the compensation cess beyond 5 years, as per the past precedence," the states proposed.

 

The base year for revenue protection may be fixed as the financial year 2024-25 (Apr-Mar). The state revenue for FY25 should comprise the GST revenues of the state and the compensation cess due to the state based on place of supply, as this would best reflect the revenue potential of States, the states proposed.

 

The opposition-ruled states said the Centre has not provided any estimate for the potential revenue loss arising from the GST rate rationalisation. "The estimates provided by various financial research institutions are ranging from INR 850 billion to more than INR 2 trillion per annum," the document said.

 

The meeting was attended by ministers of eight Opposition-ruled states--Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana and West Bengal. These states are likely to hold another meeting before the next GST Council meeting scheduled for Sept. 3-4. 

 

The upcoming GST Council meeting assumes significance after Prime Minister Narendra Modi's announcement in his Independence Day speech about the government's "Diwali Gift" in the form of lower goods and services taxes. The Centre has initiated an overhaul of the indirect tax structure which will include rationalisation of the number of GST rate slabs from four to two.

 

In its recommendation to the Group of Ministers on rate rationalisation, the Centre has suggested doing away with the 12% and the 28% tax slabs. The Centre has proposed to bring 99% of items under the 12% tax slab to the 5% slab and almost 90% of items under the 28% tax slab to the 18% tax slab. Currently, 65% of the total GST revenue comes from items falling under the 18% tax slab and 11% revenue is collected from items under the 28% slab. Only 7% and 5% GST are collected from items under 5% and 12% tax slabs, respectively. The Group of Ministers on GST rate rationalisation has accepted the Centre's proposal to shift to a two-slab structure.

 

After the meeting, Gowda said between FY18 and FY24, the net effective GST rate fell down from 14.4% to 11.6% due to rationalisation of rates. Notably, GST revenue post-refunds, as a percentage of GDP, has still not surpassed the levels recorded in the pre-GST era. With the latest rate rationalisation proposals, it is expected that the net effective GST rate would fall below 10%.

 

The Opposition-ruled states anticipate significant revenue reduction ranging 15-20% of the current GST revenues on account of the rationalisation of current tax rates, and the additional revenue forgone due to not merging the Compensation Cess fully into the GST Rate structure. "Such a revenue shock cannot be absorbed by states without drastically reducing developmental expenditure. Therefore, any rate rationalisation will have to be accompanied with adequate safeguards to protect the fiscal stability of the States," the statement said.

 

The states are of the view that simplification and rationalisation of rates are desirable objectives, but they should not be pursued at the expense of the fiscal stability of States. "The present proposal, if implemented without compensation, will cause severe damage to State revenues," the proposal said.

 

Himachal Pradesh Finance Minister Rajesh Dharmani also said that proposed GST rate cuts should not lead to any profiteering by the companies and businesses.

 

The risk of profiteering is acute as there have been occasions in the past when cuts in tax rates announced by the GST Council had not been passed on to consumers. Instead, companies have increased their profit margins. In November 2017, after the council reduced GST rates on restaurants to 5% from 18% and 12%, anti-profiteering investigations were initiated against some restaurants for allegedly not passing on the benefit of reduced taxes to customers.

 

Previously, the GST Council had set Apr. 1, 2025, as the sunset date for filing anti-profiteering cases to give businesses the autonomy to set prices for goods and services without the fear of being investigated for being in breach of anti-profiteering provisions. Under the anti-profiteering provisions of the GST law, it was mandatory for suppliers of goods and services to pass on the benefit of any reduction in the rate of tax, or the benefit of input tax credit, to recipients by way of a commensurate reduction in prices.  End

 

Reported by Sagar Sen

Edited by Akul Nishant Akhoury

 

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