Why Karnataka is wary of the GST slabs in the Centre’s rate rationalisation proposal

The Opposition-ruled states met last Friday (August 29), where they had unambiguously supported the Centre’s GST rate rationalisation proposal, but raised concerns about revenue loss. In a joint statement, the states projected losses ranging between Rs 85,000 crore and Rs 2 lakh crore in revenues per year, and sought “protection of revenue interest and fiscal stability in a federal structure”. They had said states should be compensated for revenue loss – anything lower than 14 per cent revenue growth – for a minimum of five years.

“We are not opposed to rationalisation. But the states should be compensated (for the shortfall in revenue),” Krishna Byre Gowda, the state’s revenue minister and its representative in the GST Council, said in a press conference on Tuesday (September 2).

Simplified GST tax slabs

When the GST regime began in 2017, products and services were taxed under four slabs – 5%, 12%, 18% and 28%. The centre has proposed a broad two-slab structure with a merit rate of 5% and a standard rate of 18%, besides a special demerit rate of 40% for sin and demerit goods such as paan masala, tobacco and cigarettes. The final rates will be decided after the GST Council finalises its recommendations.

The central government is of the view that the rationalisation proposal by decreasing the slabs would eventually increase tax revenue. Opposition-ruled states, including Karnataka, have disputed this claim, saying that only around 28% of the Centre’s revenue was dependent on GST.

Gowda said that a majority of this revenue loss would be borne by states, which depend on GST for 50% of their revenue. “The Centre has the sources to mobilise funds, but not us,” he said.

Karnataka: Steady tax revenue decline compared to VAT regime

Gowda said the net tax rate during the erstwhile Value Added Tax (VAT) regime was 14.5 per cent. Since the implementation of GST, the net tax rate has gradually declined to the current 11 per cent, he said.

“If the proposal is implemented, the rate could reduce by another one per cent,” he said, adding that states will have to bear 70 per cent of the losses caused due to the move.

Elaborating on this, Gowda compared the state’s revenue generation with the erstwhile VAT regime, which was replaced by GST in 2017. He said that its revenue from VAT collections generated 3.6% of Karnataka’s Gross State Domestic Product (GSDP). This has since declined, with GST earnings contributing to only 2.9% of GSDP presently.

“The revenue of states is lower than it was before 2016-17,” Gowda said, adding that Karnataka was among the biggest losers due to this.

Assuming the state grew at the 13% average growth rate it enjoyed during the VAT regime, its tax revenue generation for the 2024-25 fiscal would have been Rs 1.07 lakh cr. However, the actual figure was Rs 77,169 cr. As a result, tax revenue losses for Karnataka amounted to Rs 30,677 cr for 2024-25, Rs 24,170 cr for 2023-24 and Rs 23,654 cr for 2022-23, according to the minister.

Gowda also claimed that the revenue from the Centre, which included devolution of taxes and grant-in-aid, was at par with the funds received in 2016-17, arguing that there was no increase in funds sanctioned to Karnataka.

Other concerns

Karnataka has said that the decision to reduce the slabs was unilateral and was not taken in consultation with the state governments. If funds to the states are reduced, “how can any state government govern autonomously?” Gowda asked, adding that state governments would be reduced to a ‘glorified municipality’.

Another issue was that when the rates were slashed in the past, profits went to companies and did not benefit the common man. Gowda cited the example of an increase in cement prices over the last month, as companies expected a reduction in GST rates for the product. “Our demand is that the rationalisation should benefit people rather than the companies,” he said.