Mumbai: The government’s intent to reform Goods and Services Tax (GST) to a two-tier structure and the proposed rate rationalization could cost the exchequer more than Rs1.2 lakh crore on annualized basis (over 0.4 per cent of GDP) with states bearing a disproportionate hit.The report pegs states’ effective losses due to GST changes at 0.3 per cent of GDP.With the Centre needing states’ approval to pass the GST reform via the GST Council, it may propose sharing of any new cess (sin/clean energy) with the states, and improve its devolution under the Finance Commission recommendations to sweeten the deal and reduce states’ revenue pressures said an Emkay Global report titled GST overhaul. States not only depend on SGST or State Goods and Services Tax (SGST) as part of their own tax revenue but also receive a proportion of the Centre’s GST revenue as devolution, their effective losses due to GST changes could even hit 0.3 per cent of GDP on annualized basis said Madhavi Arora, lead economist at Emkay in a report. Nearly 45 per cent of states own tax revenue comes from SGST.The states with the highest share of SGST in their own tax revenue (ie Bihar, Gujarat, West Bengal, Karnataka and Uttarakhand) will face the most pressure. While Andhra Pradesh, Chattisgarh, Madhya Pradesh, Telangana State have a low share of SGST in own tax revenue. GST forms a large part of states’ revenue – around 23 per cent of FY25 provisional revenue receipts and around 44 per cent of FY25 provisional own tax revenue (OTR); and, with states’ fiscal position in a more precarious state than the Centre’s, the hit from GST revenue losses may be higher said Arora.States posted aggregate fiscal deficit /GDP of 3.2 per cent in FY25P – with their fiscal deficit/GDP having risen by 0.6 percentage point in only two years amid rising incidences of freebies/subsidies and constrained revenue growth. States’ Q1FY26 tax revenue growth has also been anemic (2 per cent versus 13 per cent budgeted) and thus revenue loss from the GST rate rationalization (and lower tax devolution from the Centre) will put further pressure on their already constrained fiscal position. With revex turning increasingly sticky, states may be compelled to cut capex to keep their fiscal position under control.The Centre plans to rationalize the current GST system by end September 2025, moving it to a dual-slab structure, ie 5 per cent and 18 per cent, replacing the current 4-tier structure, along with 40 per cent slab on luxury/sin goods. About 90 per cent of items in the 28 per cent slab will move to 18 per cent, and nearly all in the 12 per cent slab will move to the 5 per cent slab. Notably, some items in the highest GST slab (28 per cent) also attract compensation cess, taking their effective rate to over 40 per cent. The majority of the GST revenue (70-75 per cent) accrues from items in the 18 per cent slab. In comparison, the 28 per cent, 12 per cent, and 5 per cent slabs bring in 14 per cent, 5 per cent, and 7 per cent of total GST revenue, respectively.“Our ballpark estimates suggest that the proposed rate rationalization could cost the exchequer more than Rs1.2 trillion on annualized basis (over 0.4 per cent of GDP). Assuming implementation from October 2025, the FY26 fiscal impact for general government finances owing to GST changes would be 0.2 per cent of GDP. Assuming gross loss will be shared equally by the Centre and states, this would imply gross revenue loss of approximately 0.1 per cent of GDP from GST changes for the Centre, for FY26,” said the report. On the positive side, GST reform could ease inflation by 50-60 basis points over a year.The largest impact of around 40 basis points will come from certain goods in the Food and Beverages category (processed and packaged foods, butter, ghee, etc) moving to the 5 per cent slab (from 12 per cent now). On the other hand, most items in the 28 per cent slab are not captured in the current CPI basket (business class air travel, casinos, luxury hotels, online gaming, etc). There may be a positive impact of around 20 bps from those items that are present in the CPI basket (vehicles, ACs, packaged drinks, etc). Notably, the impending change in the CPI basket (likely February 2026 onward) is likely to reduce the weight of F&B in the basket which may mitigate some of this impact said Madhavi Arora, lead economist at Emkay Global inSuch tax changes should boost consumption in consumer durables, autos, cement,and similar sectors.
Source link
