GST Rate Cuts Spark Fiscal Alarm: Karnataka Warns of ₹2 Trillion Revenue Hit for States

India’s ambitious push toward GST rate rationalisation has triggered serious concerns among state governments, with Karnataka’s Revenue Minister Krishna Byre Gowda estimating a potential revenue loss of ₹1.5 to ₹2 trillion across states. The warning comes ahead of the crucial GST Council meeting scheduled for September 3–4, where the proposed overhaul of tax slabs will be debated.

 

The Centre’s plan to simplify the Goods and Services Tax structure—compressing the current four-tier system into a streamlined two-rate format—has been welcomed by industry and consumers. However, opposition-ruled states are demanding safeguards to protect their fiscal autonomy and revenue streams.

 

Key Developments and Fiscal Concerns

Karnataka projects a direct revenue shortfall of over ₹15,000 crore if the new GST rates are implemented

 

The broader estimate across all states ranges from ₹1.5 trillion to ₹2 trillion, according to the Karnataka Revenue Minister

 

Opposition-led states including Punjab, West Bengal, and Tamil Nadu have formally requested revenue protection mechanisms

 

The GST compensation cess, which previously cushioned states from revenue loss, is set to expire in October 2025

 

The proposed rate rationalisation includes merging the 12 percent and 28 percent slabs into a simplified 5 percent and 18 percent structure

 

Breakdown of the Proposed GST Reform

Structural Shift The Centre’s proposal aims to reduce complexity by eliminating the 12 percent and 28 percent slabs. Key consumer goods such as electronics, garments, and construction materials may shift to lower tax brackets, boosting affordability and consumption.

 

Economic Rationale The government argues that lower tax rates will stimulate demand, formalise more of the economy, and ultimately increase compliance. Analysts at Ambit Capital suggest the move could act as a fiscal stimulus, potentially lifting GDP by 20–50 basis points.

 

Revenue Implications Despite the long-term benefits, states are bracing for immediate fiscal stress. Karnataka, one of the top GST contributors, has set a ₹1.2 lakh crore GST revenue target for FY26. A ₹15,000 crore shortfall would represent a significant dent in its budgetary planning.

 

Opposition States Demand Safeguards

Several opposition-ruled states have voiced concerns over the uneven impact of the reforms:

These states are urging the Centre to either extend the compensation cess or revise the revenue-sharing formula to ensure fiscal stability

 

Karnataka’s minister emphasized that while rate rationalisation may benefit consumers, it must not come at the cost of state finances. He called for a consensus-driven approach within the GST Council, ensuring that states are not left to absorb the fiscal burden alone.

 

Market and Policy Implications

The GST overhaul is part of a broader reform agenda aimed at improving ease of doing business and attracting investment

 

Lower tax rates on essential goods could enhance consumer sentiment and retail activity

 

However, fiscal stress on states may lead to spending cuts, delayed infrastructure projects, or increased borrowing

 

The Centre’s ability to balance stimulus with fiscal prudence will be tested in the coming quarters

 

Conclusion

India’s GST reform is at a critical juncture. While simplification and rate cuts promise economic gains, the fiscal fallout for states cannot be ignored. Karnataka’s warning underscores the need for a calibrated approach—one that aligns national growth objectives with subnational fiscal resilience. As the GST Council prepares to meet, the spotlight will be on whether consensus and compensation can coexist in India’s evolving federal tax architecture.

 

Sources: Times of India, India Today, Business Today, The Hindu, Public TV.