GST 2.0: How Rate Cuts Could Impact Consumers, Businesses, and State Revenues

The Goods and Services Tax (GST) Council is preparing for a landmark meeting on September 3–4, 2025, where it will discuss the next generation of GST reforms. The proposals aim to simplify the tax structure by reducing slabs, cutting rates, and making compliance easier for businesses and consumers.

Lower GST rates could make everyday goods cheaper, spur consumption, and provide a much-needed boost to India’s economy. However, the flip side is serious: states heavily dependent on GST collections may face sharp revenue shortfalls, forcing them to explore alternative measures.

How Much Revenue Could Be Lost?

According to estimates by SBI Research and Ambit Capital, the combined loss for the Centre and states could range between ₹70,000 crore to ₹1.8 lakh crore annually. Ambit Capital frames this as a deliberate “fiscal stimulus,” designed to accelerate economic activity.

The firm’s report notes: “GST rate cuts are a more potent stimulus than income tax reductions. If price drops reach consumers without the government reducing spending, GDP could rise by 20–50 basis points.”

This suggests that while the government risks losing tax revenue, the trade-off could be higher growth and stronger consumer demand.

Which States Will Feel the Heat?

The impact of GST rate cuts will not be uniform. States’ dependence on GST collections varies, and so does their fiscal health.

• High-consumption states like Karnataka and Tamil Nadu could benefit, as increased spending may offset some losses.
• Debt-heavy states such as Punjab, Bihar, and West Bengal face severe stress, since 40% or more of their tax revenue comes from GST.
• Maharashtra, India’s largest GST contributor, could see significant short-term revenue gaps given its high fiscal deficits.
• Uttar Pradesh, Gujarat, and Haryana may also feel a sharp pinch, due to their large populations and high spending patterns.
• Smaller states such as Kerala, Punjab, Uttarakhand, and Himachal Pradesh may feel proportionally greater stress since GST makes up 30–40% of their total revenue.

The Timing Problem: End of Compensation Cess

Another challenge is the looming end of the GST compensation cess in October 2025. Originally designed to shield states from revenue shortfalls, the cess has been repurposed to repay Covid-era borrowings.

Once this ends, states will no longer have a financial buffer, leaving them vulnerable to sharp fiscal gaps if GST collections dip significantly after rate cuts.

How States Could Cope With Revenue Losses

Experts suggest that states may need to explore alternative revenue sources to compensate for GST shortfalls:

1. Higher sin taxes – The proposed 40% slab for tobacco, alcohol, and other sin goods could bring in additional funds.
2. Fuel and liquor taxes – States may increase excise duties on petroleum products and liquor.
3. Crackdown on tax leakages – Strengthening enforcement could prevent evasion and boost collections.
4. Banking on higher consumption – Governments hope that lower GST will spur spending, indirectly improving revenues.

What If Some States Resist?

The passage of GST 2.0 depends on consensus within the GST Council, which operates on a weighted voting system:

• Centre’s vote = one-third
• All states combined = two-thirds
• A proposal requires 75% of total weighted votes to pass

This means the reforms can go through even if some states oppose them, provided the Centre and enough supporting states back the proposal. However, if large contributors such as Maharashtra, Karnataka, or Tamil Nadu strongly resist, consensus could break down, delaying implementation.