Opposition States Back GST Rate Cuts, Demand Compensation

Eight opposition-ruled states—Karnataka, Himachal Pradesh, Jharkhand, Kerala, Punjab, Tamil Nadu, Telangana, and West Bengal—have endorsed the Centre’s proposal to reduce GST rate slabs from four (5%, 12%, 18%, 28%) to two (5% and 18%), with a 40% rate for sin and luxury goods, Congress leader Jairam Ramesh announced on X. However, they demand a five-year compensation mechanism, using 2024-25 as the base year, to offset an estimated ₹1.5-2 lakh crore annual revenue loss, as GST accounts for 50% of state tax revenues compared to 28% for the Centre.

The states, meeting in Delhi on August 29, proposed an additional levy on sin and luxury goods, like pan masala (currently taxed at 88%), to replace the compensation cess expiring in March 2026, with proceeds fully transferred to states. Karnataka Finance Minister Krishna Byre Gowda warned that a 15-20% revenue drop could destabilize state finances, impacting welfare and infrastructure. They also demanded anti-profiteering measures to ensure tax cuts benefit consumers, not corporations, citing past GST rate reductions that failed to boost revenue buoyancy, with the effective tax rate falling from 14.4% in 2017 to 11%.

Ramesh highlighted that the National Institute of Public Finance and Policy (NIPFP) supports these concerns, noting states’ reliance on GST for development. The Congress advocates for a “GST 2.0” with simplified compliance, especially for MSMEs, and protection of state revenues, criticizing the Modi government’s 17-18% cess revenue retention. The states will present their demands at the GST Council meeting on September 3-4, where consensus is required, potentially challenging the Centre’s plan to implement reforms by Diwali, as announced by PM Modi. Social media reflects mixed sentiments, with some praising the opposition’s push for consumer benefits, while others, like @rishibagree, accuse them of obstructing pro-people reforms.

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The proposal aligns with PM Modi’s August 15 pledge to reduce tax burdens on essentials like toothpaste and bicycles, moving 99% of 12% slab items to 5% and 90% of 28% slab items to 18%. However, states fear short-term fiscal strain, with Telangana projecting a ₹7,000 crore loss, urging cooperative federalism to balance growth and stability.

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