Wary of Rs 15,000 crore revenue loss, Karnataka to oppose Centre’s GST rate cuts; seeks compensation

BENGALURU: The state govt is wary of the Centre's decision to reshuffle and reduce goods and services tax (GST) rate slabs, suggesting that it could result in a massive revenue shortfall for the cash-strapped state. In his Independence Day speech, Prime Minister Narendra Modi announced "next generation tax reforms", following which the group of ministers (GoM) on GST rate rationalisation met and accepted the Centre's plan to compress the existing slabs of 5%, 12%, 18%, and 28% into a simpler two-rate system of 5% and 18%. The GST Council is slated to meet on Sept 3 and 4 to finalise the decision. If the council ratifies the proposal, prices of many consumer durables and electronics, currently taxed at either 12% or 28%, are expected to decline. Computer monitors, carbonated beverages, fruit juices, and construction materials like cement besides other goods — all currently taxed at 28% — may be moved to the 18% slab. Likewise, readymade garments priced above Rs 1,000, currently under the 12% bracket, may draw a lower 5% GST. "Rationalisation of GST slabs makes economic sense, as it ensures more money in the hands of consumers, benefits trade and increases revenue to the exchequer," said BT Manohar, a member of Karnataka State GST Advisory Committee. But while consumers and trade groups are optimistic, the state has voiced serious concerns over the fiscal impact. Chief minister Siddaramaiah's budget has set an ambitious GST revenue target of Rs 1.2 lakh crore for the current financial year. The state's commercial taxes department projects a potential revenue loss of more than Rs 15,000 crore if the rate cuts are implemented. Revenue minister Krishna Byre Gowda, Karnataka's representative at the GST Council, said states had expressed concerns at the GoM meeting, estimating cumulative losses ranging from Rs 85,000 crore to Rs 2 lakh crore. "Karnataka supports rate rationalisation, but this exercise will leave a permanent hole in the revenues of all state govt," Byre Gowda said. "GST is a federal arrangement. In a federal system, no decision should be unilateral. States and the Centre should both agree." Byre Gowda said states are demanding revenue protection until the tax inflow stabilises. He will also oppose the rate cut proposal at the GST council meeting. "If Karnataka's revenues take a big hit, should we be dependent on the central govt to run our govt?" he asked. "Karnataka has already suffered gross injustice from the central govt. While we support rate rationalisation, we have also demanded protection for loss of revenue." Basavaraj Rayareddi, the CM's economic adviser, echoed the sentiment saying the Centre must provide adequate compensation to states, like the compensation formula adopted from 2017 to 2022 immediately after GST was introduced. "Considering the immediate impact, the Centre must either compensate states, or it should change the share to 75:25 [larger share for states] between states and Centre from the present 50:50," said Rayareddi. Rayareddi said Siddaramaiah is expected to soon convene a meeting of finance ministers from all states in New Delhi to forge a national consensus on the issue.