Kerala FM warns of huge GST revenue loss, questions Centre’s silence on compensation

Kerala Finance Minister KN Balagopal has issued a sharp warning that the Union government’s latest GST rationalisation could drain state coffers while delivering uncertain benefits to ordinary citizens.

Speaking to reporters after the GST Council meeting in Delhi, Balagopal accused the Centre of ignoring repeated pleas for a compensation mechanism even as states face steep revenue losses.

“Huge cut downs have taken place. We are yet to ascertain the magnitude of this. There would be huge revenue loss for the states and the Union government as well. But they have other means of collecting taxes, whereas states like Kerala do not,” Balagopal said.

Kerala’s revenue loss from four sectors

The minister projected that Kerala would lose at least Rs 2,500 crore annually in just four sectors - automobiles, cement, insurance, and electronics - because of the rate cuts.

“Kerala is going to have a loss of Rs 2,500 crore from automobile, cement, insurance and electronics sectors, which means the real loss will be double this amount,” he said.

Also Read: Centre rolls out new GST regime: Only 5 pc and 18 pc slabs from Sep 22

The insurance sector alone accounts for Rs 450 crore in losses to the state, translating into a Rs 900 crore shortfall overall. Last year, Kerala’s GST revenues fell short by Rs 21,955 crore. This year, the government expects an additional Rs 8,000–Rs 10,000 crore erosion once the new slabs take effect on September 22.

‘Essential services will be hit’

With 95 per cent of Kerala’s revenue committed to recurring expenditures like salaries and pensions, Balagopal warned that such shortfalls will directly hit healthcare, education, housing (under the LIFE Mission), and welfare programmes.

“The Centre has not considered offsetting the loss in tax revenue. Without such support, essential services will inevitably come under strain,” he said.

Also Read: GST reform shows how indirect taxes can be made even more indirect

The GST Council, chaired by Union Finance Minister Nirmala Sitharaman, slashed the earlier four-tier structure to two broad slabs - 5 per cent and 18 per cent - while retaining 40 per cent for luxury and sin goods. Cement, automobiles, insurance, and several electronics items were moved from the 28 per cent bracket to 18 per cent.

'Will consumer benefit?'

Balagopal said the change, on paper, should bring relief to consumers.

“The reduction of GST from 28 per cent to 18 per cent should lower prices - particularly in cement, where the measure is expected to reduce costs by around Rs 30 per bag. But the real test is whether businesses pass on those savings to the end consumer,” he said.

Also Read: GST reforms split Opposition States: Kerala protests, Tamil Nadu cautious

Instead, he pointed to a worrying trend.

“It is typical for companies to hike prices when tax reforms come in place. Cement companies are already on that move. We have seen cases where, despite tax cuts, companies anticipate price increases of Rs 30–Rs 35. Companies should not hike prices; the benefits of the GST cut must reach ordinary people,” he said.

‘Financial strain on Kerala will worsen’

The Union government has framed the reforms as an effort to ease the tax burden on households and spur consumption. Prime Minister Narendra Modi welcomed the changes, calling them a “Diwali gift” for ordinary citizens and an important step in simplifying compliance. Industry bodies from automobile manufacturers to FMCG players also lauded the cuts, arguing they will revive demand.

But Balagopal countered that without a parallel mechanism to protect state finances, the reforms risk widening inequalities.

“The government will examine whether the reduction in taxes is passed on to consumers. The real question is who actually benefits when prices come down. Without compensation, the financial strain on Kerala will only worsen,” he warned.

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He recalled that when GST was rolled out in 2017, states were assured five years of compensation for revenue loss. That period has expired, leaving states exposed.

“The five-year compensation promise is over, but our commitments remain the same. Kerala cannot be left to bear the entire weight of reforms that are designed nationally,” Balagopal said.

‘Centre has other revenue options’

Kerala is not alone in expressing disquiet. Several states have indicated they will raise the issue in upcoming GST Council meetings. Economists like Montek Singh Ahluwalia have also questioned the two-slab structure, suggesting a single moderate slab - around 14 per cent - would be more efficient and sustainable.

Balagopal noted that the Union government has fiscal tools such as cesses and direct taxes to make up for GST cuts, while states depend heavily on indirect taxation.

“The Centre and the states do not have the same revenue options. If this imbalance is not addressed, state-level programmes that directly impact people’s lives will be jeopardised,” he said.

Also Read: Diwali comes early: Council slashes GST on everyday items; here is the full list

Balagopal clarified that Kerala is not opposed to reform or rate-rationalisation. The state supports measures that lighten the tax burden on the common man. But, he insisted, reforms must not cripple state finances.

“Citizens should reap the benefits of tax reductions, but not at the cost of state stability. Without adequate safeguards, the Centre is effectively shifting the burden from corporations to state governments. That is unacceptable,” he said.

As the new rates kick in later this month, the state will closely monitor consumer prices and industry practices.

“We will be vigilant. The benefits must reach the people. At the same time, we will continue to demand that the Union government address the revenue shock to states. For Kerala, this support is not optional - it is critical,” Balagopal concluded.