States will remain "net gainers" of the proposed GST rate rationalisation exercise with their GST revenues, including devolution, estimated to be over Rs 14.10 lakh crore this fiscal, according to an SBI Research report released on Tuesday.

It said that, as was evidenced in the earlier exercise of GST rate rationalisation in 2018 and 2019, an immediate reduction in rates can cause a short-term dip of around 3-4 per cent in month-on-month collections (roughly Rs 5,000 crore, or an annualised Rs 60,000 crore), revenues typically rebound with sustained growth of 5-6 per cent per month.

The Centre has proposed a rationalisation of rates and slabs under the Goods and Services Tax (GST) by moving to a two-tier tax structure of 5 and 18 per cent, and a 40 per cent rate for a select few items.

Currently, GST is a four-tier structure of 5, 12, 18, and 28 per cent. Also, a compensation cess in the range of 1 to 290 per cent is levied on luxury and demerit goods.

However, 8 opposition-ruled states have demanded revenue protection or compensation, saying that post the rationalisation, the average revenue loss is expected at about Rs 1.5-2 lakh crore.

SBI Research, in its report released on August 19, 2025, had said the average annual GST revenue loss to the Centre and states could be about Rs 85,000 crore.

In its report released on Tuesday, SBI Research, however, said that in FY26 as well, states will remain net gainers from GST collections, even under the proposed rate rationalisation.

This is because, first, GST is shared equally between the Centre and states, with each receiving 50 per cent of the collections. Second, under the mechanism of tax devolution, 41 per cent of the Centre's share flows back to states. Taken together, about 70 per cent of total GST revenues go to states.

"Our projections for FY26 indicate that states remain net gainers even after post-GST rate rationalisation. States are expected to receive at least Rs 10 lakh crore in SGST plus Rs 4.1 lakh crore through devolution, thereby making them net gainers," it said.

The effective weighted average GST rate has come down from 14.4 per cent at the time of the inception of GST to 11.6 per cent in September 2019.

Post the current rationalisation of rates, SBI Research believes that the effective weighted average GST rate may come down to 9.5 per cent.

SBI Research also said that evidence from earlier rounds of GST rate changes, like in July 2018 and October 2019, suggests that rationalisation does not necessarily weaken revenue collections.

Instead, the evidence points to a temporary adjustment phase, followed by stronger inflows.

In past episodes, this dynamic is translated into additional revenues of nearly Rs 1 trillion.

"Importantly, rationalisation should be seen less as a short-lived stimulus to demand and more as a structural measure that simplifies the tax system, reduces compliance burdens, and enhances voluntary compliance, thereby widening the tax base," it said.

A streamlined GST framework would be a step towards long-term revenue buoyancy and greater efficiency in the economy, it added.

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