GS3 – Indian Economy
Context
A group of eight non-BJP ruled States—Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana, and West Bengal—has proposed levying an additional cess on sin and luxury goods over the proposed 40% GST rate. The move is aimed at mitigating the projected revenue losses due to the Centre’s GST rate rationalisation, which they estimate could reduce their revenues by 15–20%. The proposal will be submitted to the GST Council in its meeting scheduled for 3–4 September 2025.
Issues Highlighted by the States
- Revenue Impact
- GST is a major revenue source for States, forming half of their own tax revenues, whereas it accounts for only 28% of the Centre’s tax revenue.
- The Centre’s plan to merge the 12% and 28% slabs into 5% and 18%, while imposing a 40% GST on select sin and luxury goods, could create a significant revenue shortfall for States.
- Potential Revenue Losses
- The eight States anticipate a 15–20% decline in GST revenue, which could severely affect development expenditure if not compensated.
- Dependence on GST
- Unlike the Centre, which has a diversified revenue base including direct taxes, customs duties, and dividends from public institutions, States rely heavily on GST for funding infrastructure and welfare projects.
Proposed Measures
- Additional Cess
- Levy a cess on sin goods (tobacco, cigarettes, gutkha) and luxury items (high-value cars, business/first-class air tickets) to protect State finances.
- Guaranteed Compensation
- States demand revenue protection for at least five years, assuming 14% annual GST growth, to ensure medium-term fiscal stability.
- After five years, the arrangement may be periodically reviewed based on GST revenue growth and buoyancy.
- Rationale
- The cess would prevent a revenue shock that could otherwise force States to cut developmental spending drastically.