States flag revenue loss after GST cuts, erosion of fiscal powers, Pg13

Key Highlights:

• States and UTs raised concerns about revenue losses from GST rationalization and reduced fiscal powers during a pre-Budget meeting with the Union Finance Minister.
• Several states requested simplified conditions for capital spending and 50-year loans, along with a focus on investment promotion.
• States like West Bengal, Telangana, Punjab, Kerala, and Karnataka highlighted revenue losses due to GST rate cuts implemented in September 2025.
• Karnataka reported a Rs 5,000 crore shortfall this year and Rs 9,000 crore annually due to post-GST rate rationalization.
• Kerala requested a special fiscal correction package to address a Rs 21,000 crore resource gap due to borrowing constraints and GSDP estimation methodologies.

Detailed Insights:

• States are facing shrinking fiscal space due to GST cuts, rising social commitments, climate shocks, and rapid urbanization, impacting their ability to finance growth and development.
• The demand for inclusion of cess and surcharge in the divisible pool was raised, with states arguing they collect these levies but do not receive the benefits.
• States are seeking a more equitable Centre-state funding pattern under Centrally Sponsored Schemes (CSS) to sustain momentum in critical infrastructure projects.
• Concerns were raised about the funding pattern of the Viksit Bharat-Guarantee for Rozgar and Ajeevika Mission (Gramin), which has replaced MGNREGA.
• The Scheme for Special Assistance to States for Capital Investment (SASCI) was highlighted as beneficial for fast-tracking asset creation and supporting capital investments.
• States emphasized the need to restore fiscal equity and cooperative federalism through measures like a 50:50 sharing of excise duty on tobacco and cess on paan masala.
• The methodology used for GSDP estimation and its impact on borrowing limits was questioned, particularly by Kerala, which cited deviations from the 15th Finance Commission's recommendations.

Key Concepts Involved:

• GST Rationalization: Restructuring of Goods and Services Tax rates to simplify the tax structure and reduce complexities.
• Divisible Pool: The portion of the central government's tax revenue that is distributed among states as per the recommendations of the Finance Commission.
• Centrally Sponsored Schemes (CSS): Programs funded by the central government but implemented by state governments.