Should States be compensated for revenue loss from GST reforms? , Pg9

Key Highlights:

• PM Modi announced GST reforms aiming for a simpler two-tier structure (5% and 18%).
• The proposed rate cuts may initially impact revenue by ₹45,000 crore in FY2025-26.
• The average GST rate is expected to decrease to approximately 10% after the reforms.
• States like Maharashtra and Karnataka may experience a more significant revenue impact than agriculture-dependent states.

Detailed Insights:

• The current GST system has an average tax incidence of 11.5%, reduced from 15% pre-GST.
• A higher tax rate of around 40% on sin goods and luxury goods is expected to partially offset revenue loss.
• The 18% GST slab, contributing 70% of GST revenues, will remain largely unchanged.
• The Centre provided states with a compensation guarantee for five years post-GST implementation, which has now ended.
• Alternative compensation mechanisms, such as a contingency fund or support from the Consolidated Fund of India, are being considered.
• States need to focus on plugging leakages, expanding the tax base, and attracting investments to become self-sufficient.
• The GST Council is likely to proceed with the proposed changes, possibly with discussions around compensation and specific product placements.

Key Concepts Involved:

• Goods and Services Tax (GST): Goods and Services Tax (GST) is a unified indirect tax on supply of goods and services, replacing multiple indirect taxes, to create a single national market.
• GST Council: GST Council is a constitutional body chaired by the Union Finance Minister, comprising Union and State representatives, to decide GST rates, exemptions, and related policies.
• Consolidated Fund of India: The government's main account for revenues and expenditures.