New Delhi: Eight opposition-ruled states, including Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana and West Bengal have expressed their support for the Union government’s rationalisation of GST slabs but demanded compensation for revenue losses due to rate cuts. 

The finance ministers of these eight states met in New Delhi on Friday (August 29) and drew a consensus on the demands to be raised ahead of the GST Council meeting on September 3-4.

In a statement, Congress MP Jairam Ramesh said on Saturday (August 30) that the eight states’ demands “are perfectly legitimate and are bolstered by recent papers published by the Union Finance Ministry's own National Institute of Public Finance & Policy (NIPFP).”

The demands included, a mechanism that ensures that the benefits of the rate cuts get passed on to consumers, compensation for a period of five years with 2024/25 as the base year, and that additional levies on 'sin' and luxury goods over and above the proposed 40% should be fully transferred to states. 

On August 15, in his Independence Day address, Prime Minister Narendra Modi announced from the ramparts of Red Fort that the government would give “a gift on Diwali” by granting relief in GST.

The next day, the finance ministry released its proposals to the GST Council to merge the 12% GST slab with the 5% one, and transfer a number of goods from the 28% GST slab to the 18% one. At present GST is applied at rates of 5%, 12%, 18%, and 28%.

The ministers who met on Friday said that states anticipate significant revenue reduction, reported The Indian Express.

In a joint statement, the states said that the revenue loss was anticipated between Rs 85,000 crore and Rs 2 lakh crore a year and sought “protection of revenue interest and fiscal stability in a federal structure”. They said states should be compensated for revenue loss – anything lower than 14 per cent revenue growth – for a minimum five years, the report said.

The revenue reduction anticipated by the states ranges from 15-20% of the current GST revenues due to rationalisation of the current tax rates, and the additional revenue foregone due to not merging the compensation cess fully into the GST rate structure, as discussed in the meeting of the GoM on Compensation Cess in December 2024.

“Such a revenue shock cannot be absorbed by the states without drastically reducing development expenditure. Therefore, any rate rationalisation will have to be accompanied with adequate safeguards to protect the fiscal stability of the states,” the statement by the ministers was quoted as saying by The Indian Express.

Jharkhand’s finance minister Radha Krishana Kishore said that even the BJP-ruled states support the need for compensation but are "not in a position to speak".

“This is not a matter of eight states. The difference is that BJP-led state governments are not in a position to speak but even they want compensation for the loss that they are going to suffer… we are representing the whole of India… the proposal being given by us is democratic, it’s in social interest, and in interest of states’ development,” he was quoted as saying.

“In the meeting to be held on September 3, if our issue is not heard in states’ and the country’s interest, then Jharkhand will want to opt for democratic method.”

In a statement, Tamil Nadu chief minister M.K. Stalin said that "without protecting state revenues, GST reforms cannot serve people."

"While welcoming the intent of reform, we stressed that any reduction must not erode State revenues that sustain welfare programmes and infrastructure. We urged that the benefits of lower rates must directly reach common people," he said.

Karnataka chief minister Siddaramaiah said that GST is a "joint responsibility" and the states and Union government must work together in the spirit of cooperative federalism.

"This requires states to be taken into confidence and their concerns addressed adequately. We expect central government to respond constructively and positively, engage with states in good faith in the true spirit of cooperative federalism.

"Adding to this, Karnataka has already been subjected to discrimination in the devolution of funds from the Union Government, suffering an annual shortfall of nearly Rs 25,000 crore. Any further erosion of GST revenues will only compound this injustice and directly affect our capacity to deliver on the promises of development and welfare," he said.

Telangana finance minister Bhatti Vikramarka Mallu said that the state had emphasised the need for a fair compensation mechanism and "expressed serious concerns that the proposed rate changes may lead to losses of nearly Rs 7,000 crore, adversely impacting welfare & development programmes."

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