Embrace the Diwali Joy: SBI Urges States to Welcome PM Modi’s GST Gift as a Path to Prosperity!

The State Bank of India (SBI) has projected that Indian states will continue to be net benefactors from Goods and Services Tax (GST) collections in the current fiscal year, even amidst discussions of potential tax rate rationalization. This outlook comes despite concerns raised by several opposition-led states about possible revenue losses due to tax reductions touted by Prime Minister Narendra Modi as a Diwali gift to citizens.

According to SBI’s research note, GST revenues are shared between the central and state governments, with each receiving 50% of collections. The central government also devolves 41% of its share back to states, leading to an approximate 70.5% of every ₹100 collected in GST flowing into state coffers. SBI estimates that states will gather around ₹10 lakh crore from State Goods and Services Tax (SGST) and an additional ₹4.1 lakh crore through devolution this fiscal cycle, reinforcing their position as net gainers.

The bank underlined that these projections are calculated irrespective of the additional consumption boost expected from rate rationalization. An effective GST rate of 9.5% could yield an additional ₹52,000 crore in revenue for both the Centre and states, aiding the overall fiscal landscape.

However, eight opposition-run states voiced significant concerns last week, warning that proposed GST reforms could result in revenue losses of up to ₹2 lakh crore. They are advocating for full compensation from the central government over the next five years and have suggested introducing levies on sin goods to maintain overall tax burdens while ensuring equitable revenue distribution.

Finance ministers from Tamil Nadu, West Bengal, Karnataka, Telangana, Kerala, Punjab, Jharkhand, and Himachal Pradesh convened ahead of the GST Council’s upcoming meeting scheduled for September 3-4, signaling proactive engagement in the discourse.

On August 15, Prime Minister Modi assured 1.4 billion consumers of lower consumption taxes as part of a promise to cushion potential effects from external economic pressures, such as tariff increases from the United States. Reports indicate that the revised GST framework might consolidate existing rates-currently set at 0%, 5%, 12%, 18%, and 28%—into fewer categories. Consumer staples presently taxed at 12%, including dairy and textiles, could see reductions to 5%, while higher-end goods like air conditioners could drop from 28% to 18%.

The financial landscape for the auto industry is also poised for change, as car manufacturers have long lobbied against hefty taxes, including a 20% additional levy on top of the 28% GST on luxury vehicles. A new comprehensive tax rate of 40% is anticipated, with small cars and motorcycles likely to transition to an 18% slab.

SBI noted that historical data from previous GST adjustments in July 2018 and October 2019 indicates that rate rationalization doesn’t necessarily weaken revenue streams. Instead, it often leads to a temporary dip followed by a robust recovery. A potential short-term revenue decrease of 3-4% could occur, equating to about ₹5,000 crore monthly, but historical trends suggest revenues generally stabilize with consistent growth of 5-6% per month.

The bank emphasized that rate rationalization should not only be viewed as a stimulus for demand but rather as a structural reform that simplifies the tax system and enhances compliance. SBI also highlighted that remaining surpluses in the compensation fund could be utilized to address potential revenue losses experienced by states.

As discussions continue at the GST Council meeting, attention is drawn to several outstanding issues, including the need for technological improvements in GST registration and the complications of the current inverted duty structure, potentially alleviating burdens on businesses and consumers alike as India strides toward a more efficient tax framework.

Original Source: https://m.economictimes.com/news/economy/finance/sbi-to-states-dont-fear-pm-modis-diwali-gst-gift-youll-still-be-net-gainers/articleshow/123650760.cms
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Publish Date: 2025-09-02 13:09:00