Prime Minister Narendra Modi’s plan for sweeping goods and services tax (GST) cuts may face a delay as opposition-ruled states have sought compensation for any revenue loss from the overhaul.
In a rare Independence Day pledge, Modi pitched rate reductions on household items and aspirational goods as a Diwali gift ahead of the October festival.
However, states want stronger fiscal safeguards. Economists see the tax cuts as a way to balance the likely economic impact of the punitive US tariffs on India.
New Delhi has proposed a two-rate GST of 5 per cent and 18 per cent, with some luxury and sin goods such as cigarettes taxed at 40 per cent. States broadly accept the framework but are wrangling over safeguards for their finances.
Eight states, including Tamil Nadu, Himachal Pradesh, Bengal and Kerala, said on Friday the rejig could cut revenues by ₹1.5 trillion to ₹2 trillion a year, with states bearing over 70 per cent of the loss. “If states lose 20 per cent of GST revenue, it will destabilise the fiscal structure of state governments across the country,” said Krishna Byre Gowda, Karnataka’s revenue minister.
The federal government has not issued its own estimate, but economists peg the annual hit at ₹1.1 trillion to ₹1.8 trillion. Gross GST collections reached a record ₹22.1 trillion in FY2025, 9.4 per cent higher than a year earlier.
Any change must be cleared by the GST Council, chaired by the Union finance minister with state ministers as members; most decisions are taken unanimously. The council meets next week.
Opposition ruled states propose a fresh levy on luxury and sin goods, with proceeds passed entirely to states, replacing an earlier compensation cess that is set to lapse.
India rolled out GST in 2017 and promised to compensate states for losses until 2022. During the 2020 pandemic slump, the Centre borrowed via market loans and extended the additional levy until June 2026 to repay those borrowings.
Two government said the loan repayments would be over by October-end, and it would be illegal to collect this levy after the loans are fully repaid. States also want the Centre to raise loans and compensate them for at least five years due to revenue loss.