GST: States' fear regarding revenue attrition legitimate

The apprehensions expressed by state governments regarding potential revenue attrition under the proposed Goods and Services Tax (GST) rate restructuring appear to be both legitimate and consequential.

Preliminary estimates suggest that the annual revenue foregone could range from ₹50,000 crore to in excess of ₹2 lakh crore, contingent upon the specific contours of the rate rationalisation adopted. Such fiscal implications are not uniform across the board; rather, they are expected to disproportionately affect states with higher dependency on GST compensation and limited alternative revenue streams.

Opposition-led states have underscored the imperative for the central government to institute robust and transparent compensation mechanisms prior to any recalibration of GST rates.

Their position is anchored in the principle of cooperative federalism and the need to safeguard fiscal stability at the sub-national level, which does merit consideration.

Without adequate compensatory frameworks, the projected revenue shortfall may compel states to curtail critical developmental expenditures, including social welfare programs, infrastructure investments, and disaster recovery initiatives.

 The short-term fiscal stress could be particularly acute for states grappling with legacy shocks—such as natural calamities—or those with expansive public spending obligations. States have reiterated that any transition to a new rate regime must be accompanied by a mechanism that guarantees a baseline revenue growth trajectory.

Without such assurances of compensating revenue loss or showcasing a clear case of negligible revenue loss, the ability of states to sustain essential public services and developmental priorities may be severely compromised.

With the GST Council having formally endorsed a dual-rate structure which is a welcome move, attention now turns to the future of the compensation-cess framework. The absence of clarity on whether this mechanism will persist under the new regime has heightened the stakes for states and intensified deliberations within the Council. The outcome of these negotiations will be pivotal in determining the fiscal contours of Centre-State relations in the post-restructuring landscape.

Views are personal. The author is Partner - Tax Planning & Optimisation, Grant Thornton Bharat.