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A recent SBI Research report indicates that states are likely to remain net gainers even after the proposed GST rate rationalisation. The move, which shifts the current four-tier GST structure to a two-tier system of 5% and 18%, with select items taxed at 40%, may initially cause a 3-4% short-term dip in monthly collections. However, evidence from previous rate rationalisations in 2018 and 2019 shows revenues rebound within months. With about 70% of total GST revenues ultimately flowing to states, they are expected to receive over INR 14.1 lakh crore in FY26, including SGST and devolution.
States are projected to remain net gainers from the proposed GST rate rationalisation, with total revenues, including tax devolution, estimated to cross INR 14.1 lakh crore in the current fiscal, according to a report by SBI Research released earlier this week. Advertisement
The report noted that past experiences with GST rate rationalisation, particularly in 2018 and 2019, indicate that an immediate reduction in rates can lead to a temporary 3-4% decline in month-on-month collections, equivalent to around INR 5,000 crore or an annualised INR 60,000 crore. Revenues, however, typically recover with sustained growth of 5-6% per month.
The Centre has proposed a simplification of GST by moving from the existing four-tier structure of 5%, 12%, 18%, and 28% to a two-tier system of 5% and 18%, with a 40% rate applied to a few select items. Currently, a compensation cess ranging from 1% to 290% is levied on luxury and demerit goods.
Eight opposition-ruled states have expressed concerns about potential revenue losses, estimating the average reduction at INR 1.5-2 lakh crore after rationalisation. Earlier projections by SBI Research had suggested that the combined annual GST revenue loss for the Centre and states could be around INR 85,000 crore.
Despite this, SBI Research highlighted that states would still remain net gainers in FY26 due to the GST sharing mechanism. Half of the GST collections go to states, and an additional 41% of the Centre's share is devolved back to them. Overall, about 70% of GST revenues ultimately benefit states. The report projected that states could receive at least INR 10 lakh crore through SGST and INR 4.1 lakh crore via devolution.
The effective weighted average GST rate has already declined from 14.4% at the inception of GST to 11.6% in 2019, and post-rationalisation, it may fall further to 9.5%. Past evidence suggests that rationalisation does not weaken revenue collections in the long term. Instead, a brief adjustment period is usually followed by stronger inflows, sometimes translating into additional revenues of nearly INR 1 trillion.
SBI Research emphasised that rationalisation should be viewed as a structural measure rather than a short-term stimulus. It simplifies the tax system, reduces compliance burdens, encourages voluntary compliance, and broadens the tax base. A streamlined GST framework is expected to contribute to long-term revenue buoyancy and greater economic efficiency.
Source PTI
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