Ahead of the 56th GST Council meeting, Karnataka has raised concerns over the Centre’s proposed GST rate rationalisation, estimating an annual revenue shortfall of Rs 15,000 crore. The state government warned that the move could impact its ability to run essential services and maintain fiscal stability.
Opposition-ruled states seek compensation
At a meeting on August 29, opposition-ruled states expressed support for the Centre’s plan to simplify GST but projected potential revenue losses ranging from Rs 85,000 crore to Rs 2 lakh crore annually. The states emphasised the need for protection of revenue interest and fiscal stability, calling for compensation for any shortfall below 14% revenue growth for at least five years.
Karnataka’s Revenue Minister, Krishna Byre Gowda, said, “We are not opposed to rationalisation. But the states should be compensated for the shortfall in revenue.” He stressed that states bear a larger share of GST dependence, with roughly 50% of their revenue coming from this source, compared to only 28% of the Centre’s revenue.
Simplified GST slabs proposed
Since the introduction of GST in 2017, products and services were taxed under four main slabs – 5%, 12%, 18%, and 28%. The Centre has proposed a simplified structure with a merit rate of 5%, a standard rate of 18%, and a special demerit rate of 40% for goods such as paan masala, tobacco, and cigarettes. Final rates will be decided after GST Council deliberations.
The central government believes that reducing the number of slabs will eventually increase overall tax revenue. However, Karnataka and other opposition-ruled states have questioned this, citing that states bear the brunt of revenue shortfalls.
Decline in Karnataka’s tax revenue
Gowda highlighted that Karnataka’s net tax rate under the former VAT regime was 14.5%, which gradually declined to 11% under GST. He added that the proposed rationalisation could reduce rates by another 1%, leaving states to absorb 70% of the resulting losses.
Comparing revenue from VAT and GST, Gowda said VAT contributed 3.6% of Karnataka’s GSDP, while GST earnings now account for only 2.9% of GSDP. The state’s tax revenue losses amounted to Rs 30,677 crore for 2024-25, Rs 24,170 crore for 2023-24, and Rs 23,654 crore for 2022-23. He also noted that central devolution and grants have not increased since 2016-17.
Other concerns
Karnataka criticised the unilateral nature of the decision, saying rate reductions were not taken in consultation with state governments. Gowda warned that such moves could reduce state autonomy, leaving governments “like glorified municipalities.”
The state also expressed concern that previous GST rate cuts primarily benefited companies rather than consumers. He cited the recent increase in cement prices, where companies profited in anticipation of rate reductions, arguing that rationalisation must benefit the people, not corporations.