United front of Opposition-ruled states poses new challenge to proposed GST cuts

Ahead of next week's GST Council meeting which has huge tax cuts on the agenda, states ruled by Opposition parties decided on Friday (August 28) to forge a common strategy to demand compensation for the anticipated loss of revenue — estimated to be around Rs 50,000 crore during this financial year and nearly Rs 1.5 lakh crore in the next financial year.

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At a meeting convened at Karnataka Bhavan in New Delhi, the eight state governments resolved to demand protection of their revenue interests when the GST rationalisation exercise comes up before the GST Council at its 56th meeting on September 3 and 4.

The biggest cut in GST is expected now, and apprehensions about revenue losses to states have resurfaced once again. NDA-ruled states are backing the central government's strategy of cutting GST, while the Opposition-ruled states do not want to grapple with potential revenue losses, especially at a time when Tamil Nadu, West Bengal, and Kerala are heading for Assembly elections.

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Kerala vocal about issues

Loss in revenue could disrupt social welfare programmes and development projects, a joint statement issued by the eight state governments said. States like Kerala have been openly expressing their concerns over revenue forgone due to GST cuts expected in September.

Prime Minister Narendra Modi, in his Independence Day speech, promised GST cuts on items used by common people as a Diwali bonanza, and current indications suggest that the proposed relief will be implemented well before the festival of lights sparks up consumption.

Opposition-ruled states are not in a position to oppose the GST cuts as the Congress and other Opposition parties have been attacking the Narendra Modi government for imposing a heavy GST burden instead of a low tax regime as originally envisaged. In any case, it will not be politically correct for any party to speak against GST cuts that will make goods and services cheaper.

Therefore, the Opposition-ruled states have adopted a nuanced approach focused on safeguarding their revenue. While the Central government has, so far, not spelt out the revenue impact of the proposed GST reduction, various organisations have estimated a wide range from Rs 80,000 crore to Rs 2,50,000 crore in a full financial year as the potential revenue forgone.

Opposition-ruled states feel that the buoyancy due to lower taxes may not make up for the cut in tax rates — at least in the short term and medium term. Therefore, they want compensation for at least 5 years — through a mechanism similar to the GST compensation cess.

"All ministers and representatives present voiced serious concerns about the substantial revenue loss leading to disruption in social welfare programmes and developmental expenditures under the Union Government's current (GST rationalisation) proposal," the joint statement issued by Tamil Nadu, Karnataka, Punjab, West Bengal, Telangana, Kerala, Himachal Pradesh and Jharkhand explained. GST cuts should be passed on to customers and the rationalisation exercise should not result in profiteering, the statement added.

Revenue loss fears resurface

Tamil Nadu Finance Minister Thangam Thennarasu, Punjab Finance Minister Harpal Singh Cheema, Karnataka Revenue Minister Krishna Byregowda, Kerala Finance Minister K N Balagopal, and Jharkhand Finance Minister Radha Krishna Kishore were present at the consultation of opposition-ruled states. Deputy Chief Minister Mallu Bhatti Vikramarka represented Telangana while Technical Education Minister Rajesh Dharmani represented Himachal Pradesh, officials present at the meeting said. Senior bureaucrats from West Bengal and other states also attended the consultation, they added.

Tamil Nadu Chief Minister MK Stalin stressed that GST reforms cannot serve the people without protecting the revenue of states. "While welcoming the intent of reform, we stressed that any reduction must not erode state revenues that sustain welfare programmes and infrastructure. We urged that the benefits of lower rates must directly reach common people," he said in a post on X, referring to the decisions taken by opposition-ruled States in New Delhi.

"All eight states are eager to work with the Union Government and other State Governments to ensure that the GST rate rationalisation exercise results in beneficial outcomes for all the stakeholders," the joint statement said.

Based on the consultations, the eight states are preparing a common strategy for the forthcoming GST Council consultation. When GST was introduced in July 2017, states were promised compensation for potential revenue losses and a cess was introduced to fund the payouts.

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Tax cuts to offset Trump’s tariffs

BJP-ruled states also face a similar situation, but they are not in a position to speak out, Jharkhand Finance Minister Radha Krishna Kishore said. The eight states ruled by the opposition are not alone, he commented.

"It was jointly decided to request the GST Council to place this matter on the agenda of the forthcoming GST Council meeting and to urge all other States, as well as the Union Government, to support this proposal," the joint statement indicated the line of action planned by opposition-ruled States. Decisions at the GST Council are arrived at by consensus and if the eight States together press for compensation, the proposal to cut GST and introduce sweeping reforms could face a massive roadblock.

With the steep import tariffs of the US threatening to hurt India's economic growth engine, the Centre feels GST cuts could provide some solace for Indian industries by boosting consumption through cheaper goods and services. It has been recommended to slash GST slabs, a significant reduction in GST on daily consumption items and key services like health insurance and life insurance.

While the reports of the Group of Ministers will aid the Union Government in pushing for tax cuts at the GST Council, the stand adopted by the opposition-ruled States poses a new challenge. "After the deliberation, a consensus was reached that the draft proposal would be the minimum to safeguard the States' revenue interests while achieving GST rate rationalisation," the joint statement said.

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New GST slabs

The Union Government's proposal is to eliminate the 12 per cent and 28 per cent slabs in the GST architecture and reduce the GST on daily consumption items to 5 per cent. While other items will face 18 per cent GST, a new 40 per cent slab is expected to be introduced for items like tobacco. Textiles, footwear, and processed foods are among the daily-use items that will be taxed at 5 per cent to provide relief to the poor and boost consumption at the same time, officials familiar with the current deliberations said. Along with items like alcoholic beverages, petroleum products like petrol, diesel, LPG, kerosene and aviation turbine fuel are taxed by states and efforts to bring them under GST have been resisted due to concerns over revenue decline.

States will suffer 71 per cent of the revenue lost due to rate rationalisation, Karnataka Revenue Minister Krishna Byregowda said. While we support rate rationalisation, the benefits should go to consumers and industry should not be allowed to make windfall profits, he said after the consultations between opposition-ruled States.

Kerala has lost significantly in terms of revenue due to the introduction of GST, said Kerala Finance Minister K N Balagopal. Every state is suffering the same fate and the Union Government should consider our plea seriously, he added.