GST 2.0 has sparked a contentious debate over India’s fiscal federalism, as states fear significant revenue shortfalls despite the Centre’s optimism. The new tax system simplifies rates to primarily 5% and 18%, with a 40% levy on luxury and sin goods. While this is designed to boost consumption, states are bracing for an immediate fiscal blow.
The core of the issue lies in the transition of many goods from higher 12% and 28% tax slabs to the new, lower rates. This has prompted states like Kerala and Jharkhand to project substantial annual revenue losses, fearing they’ll be unable to fund essential welfare and infrastructure projects.
The central government counters this by arguing that lower taxes will stimulate consumer spending, thus expanding the overall tax base and eventually compensating for any initial losses. This view is supported by analysis from institutions like SBI Research, which suggests that historical rate cuts have ultimately led to revenue growth.
However, states remain unconvinced and financially vulnerable. The GST compensation cess, which previously protected states from revenue shortfalls, ended in 2022. Without this crucial safety net, states are concerned that the promised "consumption buoyancy" will take too long to materialize, leaving them with immediate budget deficits.
This standoff highlights the ongoing tension between central tax policy and state financial autonomy. The outcome of this fiscal tug-of-war will not only shape India’s tax landscape but also test the delicate balance of cooperative federalism.
See What’s Next in Tech With the Fast Forward Newsletter
Tweets From @varindiamag
Nothing to see here - yet
When they Tweet, their Tweets will show up here.
