India's economy to hurt if states not compensated for GST losses: Kerala FM

New Delhi: Kerala faces a likely annual revenue loss of  ₹8,000-10,000 crore due to the reduction in goods and services tax (GST) rates across segments that was announced by the GST Council on Wednesday, Kerala finance minister K.N. Balagopal said. Almost all states will face a revenue squeeze, he said, and if the central government does not address their revenue losses, it will have a negative impact on the broader economy.

Kerala had budgeted  ₹46,563 crore of GST revenue in FY26, estimating a 12.5% annual growth.

Addressing the media, Balagopal said while economic theory suggests, and a point also made by the Centre, that improved consumption demand arising from the tax cuts would fuel revenue buoyancy, the same will actually depend on state-specific consumption patterns.

“We studied the revenue implications of tax rate cuts on four items—automobiles, health and life insurance, cement and electronics. These sectors together are expected to see a revenue loss of  ₹2,500 crores a year for Kerala. We expect Kerala’s overall revenue loss could be  ₹8,000-10,000 a year,” said the state's finance minister.

“We requested that some kind of compensation should be offered to states, as existed earlier. There is no need to levy any extra taxes for that. The cess on sin goods like tobacco can be continued and the proceeds could be transferred to states,” Balagopal said.

As per the GST Council’s decision on Wednesday, the compensation cess levied on cars will expire when the revamped GST regime kicks in on 22 September, but that on sin goods will continue so that the market loans raised by the Centre to give liquidity support to states during the pandemic could be paid. The council also decided that the Union finance minister, GST Council chairperson, may decide the actual date of transition to the revised rates of GST approved for tobacco and products.

Balagopal said that further proceeds of this cess, once this loan is paid off by the Centre, could be used to compensate states.

At Wednesday's meeting, the Kerala minister had told the council that serious thought must be given to protecting states' revenues. According to Balagopal, state-specific cesses should be permitted, based on the paying capacity of the society, to address any revenue shortfall.

Also, the revenue-sharing ratio between the Centre and states should be revised in favour of states, ideally to 60:40. At present, Centre shares 41% of its tax revenues with states, as per a formula recommended by the Fifteenth Finance Commission. The Sixteenth Finance Commission is expected to give the revenue-sharing formula for the five years starting FY27, in October.

“Public finance is very important. We requested the Centre to look into it. If the fiscal stress of states is not addressed, it will negatively impact the economy,” said Balagopal. He also said that protecting states’ revenues is essential not only to preserve fiscal federalism but also to maintain the trust of states in the GST system.

The minister also sought “strong safeguards” to ensure businesses pass on the benefits of the tax rate reduction to the end consumer.

Addressing the media after the GST Council meeting late Wednesday, the central government's revenue secretary Arvind Srivastava had said that officials of the Centre and state will engage with the industry to ensure businesses pass on the benefits of the tax cuts.

The GST Council on Wednesday cleared the biggest reform of the eight-year-old indirect tax system by compressing the four-rate tax structure into two, leading to reduction of tax burden on about 400 goods and services.

Most experts called it a masterstroke of simplification. “It will make compliance easier, reduce cascading, and strengthen the competitiveness of the Indian industry,” said Rajiv Memani, president of the Confederation of Indian Industry.

Sanjay Nayar, the president of ASSOCHAM, said the industry chamber will encourage businesses to pass on the benefits to consumers that will help increase consumption, and thereby drive a virtuous economic cycle. “It will also give a boost to micro, small and medium enterprises and will help strengthen manufacturing in India,” he added.