States Brace for Revenue Crisis as Tax Rates Are Cut, ETCFO
Several state governments are bracing for substantial revenue losses following the goods and services tax (GST) rationalisation that reduced levies on a wide range of consumer categories. Estimates from states such as Karnataka, Kerala, Punjab, Jharkhand, Himachal Pradesh, and West Bengal suggest that the annual shortfall could run into thousands of crores, raising concerns over the impact on funding for welfare schemes and development programmes.
Karnataka expects the sharpest hit, with an estimated loss of Rs 15,000 crore annually, while Kerala has projected a shortfall of Rs 8,000–10,000 crore. Punjab has pegged its potential loss at over Rs 4,000 crore, Jharkhand at around Rs 2,000 crore, and Himachal Pradesh at Rs 1,000 crore. Finance ministers from multiple opposition-ruled states have already met to coordinate their response, arguing that the move could undermine state finances and affect allocations to critical areas such as health, education, and social welfare.
The rate overhaul
The rate overhaul, which takes effect from September 22, shifts the GST structure from four slabs to a streamlined two-rate system, cutting taxes on many consumer essentials from 18% to 5%. While the Centre expects the lower rates to drive a surge in consumption and offset the revenue gap over time, states worry that the benefits may take longer to materialise, leaving them grappling with immediate fiscal pressures.
Luxury cars and other high-end categories have also seen reductions, moving from a 50% tax rate, including cess, to 40%. Critics argue that this, alongside the deep cuts on staples, could worsen disparities in the system while straining already stretched state budgets.
Despite these concerns, the GST Council approved the changes unanimously earlier this month. The Centre has assured states that both tiers of government will share the revenue burden, while pointing to expected gains from higher consumer demand as a medium-term offset.
