Despite recent steps by the GST Council to simplify rates and correct inverted duty structures, state GST revenue growth has started to slow down, raising questions about the immediate benefits of these policy changes.

"Gross fiscal deficit of states during April-July 2025, as a proportion of budget estimates for the financial year, was higher than the same period last year. This was largely due to moderation in the growth of states’ goods and services tax collections and slackening of growth in sales tax/VAT," according to the RBI Bulletin.

The bulletin also noted that revenue expenditure remained strong while capital expenditure slowed in July. According to analysts, this pattern is characterised by stable current spending but declining capital outlays, which constricts budget space; states are finding it more difficult to increase investment when revenues decline.

The bulletin states that the GST Council has introduced important changes (rate rationalisation and process simplification), designed to assist in the medium term, but the RBI observes a timing mismatch between reform announcements and immediate receipts.

The decisions of the GST Council in its meeting on September 3, 2025, initiated major structural reforms in the GST regime, simplifying rates and procedures. The four existing slabs (5%, 12%, 18%, and 28%) have been streamlined primarily into two (5% and 18%), with rationalisation affecting various sectors. The new framework aims to strike a balance between the needs of ordinary taxpayers and easier administration. Most essential items now attract either nil or 5% GST.

It has been noted that most electronic items and motor vehicles will be taxed at 18%. A new category has also been introduced for luxury and sin goods, with a tax rate of 40%. Besides rate simplification, the reforms also address challenges related to the inverted duty structure.

“Overall, these reforms are expected to boost tax buoyancy, improve compliance, and contribute to greater ease of living as well as ease of doing business,” per the Bulletin.

This indicates that reforms are structural and beneficial for buoyancy, but the RBI’s fiscal note suggests that the benefits might not be immediate for state coffers.

However, the Bulletin also noted that the high-frequency indicators for overall economic activity remained strong in August. "GST e-way bills grew rapidly and posted their second-highest total, reflecting inventory stocking for the festive season and a surge in orders ahead of additional US tariffs on Indian exports.”

The RBI indicates that while some high-frequency economic indicators have improved, tax receipts (including state GST) did not increase at the same pace, reflecting a moderation in state GST growth.