TN takes lead with Opposition bloc to push for compensation at GST Council meet

Luxury goods cess

The proposal by Opposition-ruled states to the Centre is to impose a cess on luxury goods and use the revenue to compensate states.

Also read: GST Council meet on rate reform begins; Opposition states seek compensation

In fact, a joint document prepared by Opposition-ruled states said, "Therefore, it is the considered recommendation of the states that rate rationalisation should be supported by a robust revenue protection framework, a supplementary levy on sin and luxury goods, and a guaranteed compensation mechanism for at least five years. Only such a balanced approach will protect the fiscal autonomy of the states while advancing the objectives of GST reform in the true spirit of cooperative federalism."

However, it is not clear if this will be considered practical by the Union government, which plans to hike GST on luxury and sin goods to 40 per cent, from the current level of 28 per cent. After hiking the GST to 40 per cent, will it be pragmatic to impose a cess on top of the higher tax, highly-placed sources in the GST Council quipped. Hence, the demand for compensation through a cess is likely to face a serious challenge at the GST Council.

Who gets GST cut benefits?

Along with Kerala, West Bengal, Karnataka, Himachal Pradesh, Punjab, Telangana, and Jharkhand, Tamil Nadu has decided to emphasise at the two-day GST Council meet that states should get their compensation and consumers should get the benefit of GST cuts. Therefore, Opposition-ruled states have stressed that corporates should not be allowed to convert the GST cuts into windfall profits.

While the objectives are clear, Opposition-ruled states are keeping their cards close to their chest so that their strategy is not preempted by the NDA-ruled States. The Union government plans to impose 40 per cent GST on premium luxury cars, high-end motorbikes, carbonated drinks, tobacco and pan masala – far higher than the 28 per cent GST bracket.

Luxury and sin goods are anyway going to bear burden of GST reforms, while essential goods used by the poor and middle-class will move to lower tax brackets.

Revenue loss with GST cuts

Estimates of the anticipated revenue foregone due to proposed tax cuts range from around Rs 50,000 crore during the current financial year and nearly Rs 1.4 lakh crore in the next financial year.

Since 70 per cent of the burden would fall on the states according to estimates made by Tamil Nadu and its allies, the demand for compensation is expected to be a vital part of GST Council proceedings on Wednesday and Thursday.

Diwali bonanza

At the end of the two-day deliberations, finance minister Nirmala Sitharaman is expected to announce significant tax cuts as Prime Minister Narendra Modi has already announced the GST cuts as Diwali bonanza.

Also read: Opposition-ruled states meet, seek compensation to greenlight GST rejig

The current expectation is that the GST cuts would come into force this month, probably in the second week, to boost consumption ahead of the festival season. Therefore, the impact of the GST cuts would be felt during the second half of 2025-26.

States tread fine line

Since Congress and many Opposition parties have called for GST cuts to reduce the burden on the common man, Opposition-ruled States are balancing their demand for compensation delicately in order to ensure that they are not seen as opposed to GST cuts. Attributing that kind of stand to the Opposition would project them as anti-poor, a label that will be detrimental especially during the election season.

The breakfast meeting hosted by Tamil Nadu finance minister Thangam Thennarasu was attended by West Bengal finance minister Chandrima Bhattacharya, Punjab finance minister Harpal Singh Cheema, Karnataka revenue minister Krishna Byregowda, Kerala finance minister K N Balagopal, and Jharkhand finance minister Radha Krishna Kishore, Telangana deputy chief minister Mallu Bhatti Vikramarka and Himachal Pradesh technical education minister Rajesh Dharmani.

The ministers and the officials accompanying them were tight-lipped on the deliberations at the breakfast conclave held at Tamil Nadu House.

Stalin's firm message

Meanwhile, TN Chief Minister MK Stalin had already emphasised that GST reforms cannot serve the people without protecting the revenue of states.

Also read: Will GST rejig rewrite history, spur consumption and growth?

"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 last week, after the FMs of eight Opposition-ruled states had deliberated on the Union government’s proposed GST rate rationalisation in New Delhi.

TN chief minister's stand is being actively pursued in New Delhi by finance minister Thangam Thennarasu, officials said. A separate proposal by the eight states will be tabled at the GST Council meeting, pointed out sources.

BJP-ruled states

Interestingly, NDA-ruled states have not demanded any compensation and they are backing the Union government's proposals.

The stand that will be taken by Andhra Pradesh and Bihar, ruled by BHP's allies, at the GST Council meeting, is being watched keenly even though it is known that BJP-ruled states will toe the line of the Modi government.

BJP-ruled states are likely to argue that GST cuts are necessary to partially offset the impact on India Inc due to the steep 50 per cent import duty announced by the US government.

Revenue stagnation

Opposition-ruled states, however, would emphasise the revenue loss since 2017 to press for compensation, officials with knowledge of deliberations leading to the united stand for compensation explained.

The joint document prepared by TN and its allies pointed out, "However, each round of rationalisation so far has had an adverse impact on state revenues as the buoyancy expected to compensate for these revenue losses has not materialised. It is estimated that between FY18 and FY24, the net effective GST rate fell down from 14.4 per cent to 11.6 per cent due to rationalisation of rates."

Further, it said, "Notably, GST revenue (post-refunds), as a percentage of GDP, has still not surpassed the levels recorded in the pre-GST era. With the latest rate rationalisation proposals, it is expected that the net effective GST rate would fall below 10 per cent. It is therefore not correct to assume that future rationalisation will automatically deliver the buoyancy required to offset revenue loss."

GST rejig

As the GST Council deliberations took off on Wednesday, the Union government explained the case for GST cuts with the reports of the Group of Ministers submitted recently for the Council's consideration.

The current proposal is to do away with the 12 per cent and 28 per cent slabs in the GST architecture and reduce 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.

Safeguards for states

It is clear that the Opposition-ruled states will resist moves impacting their revenue, officials said. "

"Consequently, any new proposal for rate rationalisation must be tempered by a realistic assessment of the extent to which buoyancy can compensate for revenue losses. It should be accompanied with clear safeguards built-in to the GST framework to protect the fiscal interests of the states, given the very high likelihood of a substantial revenue shortfall post the rate rationalisation," said the document prepared by the Opposition-ruled states.