Uttar Pradesh and Bihar are receiving significantly more in tax devolution than their contribution
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DHARMAPADA BEHERA
Finance Ministers from Telangana and Kerala have alleged that the recent GST rate rationalisation will severely compromise States’ finances, increasing their dependency on the Centre. Telangana Finance Minister Bhatti Vikramarka Mallu and his counterpart from Kerala, KN Balagopal, raised these concerns during a special interaction on GST organised by The Hindu. Mallu pointed out that States, such as Uttar Pradesh and Bihar, are receiving significantly more in tax devolution than their contribution, a share he argued should be proportional to the contribution.
Telangana, for example, receives only ₹0.46 for every ₹1 it contributes to the Central kitty, while Bihar gets over ₹6. Higher the share in tax, higher should be the proportion,” he demanded.
Mallu projected that Telangana could forgo between ₹6,500 and ₹7,000 crore due to the rate cuts, asking, “We have designed so many welfare schemes, now how these to be funded?”
“States’ dependency on Centre will increase. We have designed so many welfare schemes, now how these to be funded,” he asked.
Echoing the anxiety, Balagopal projected a loss of ₹8,000 to ₹10,000 crore for Kerala this fiscal year, calling the current form of GST “not good for the country”.
He dismissed the expectation of a sustained consumer boom from the rate cuts, arguing that consumers lack the money to support it. Balagopal highlighted the fiscal imbalance: States bear 64 per cent of total expenditure, yet the Union retains about 2/3rd of the income. Furthermore, States have limited options for generating their own tax revenue, noting that they cannot increase tax on alcohol without risking a drug menace, and revenue from fuel tax is already declining due to the rise in electric vehicles.
The GST Council’s recommendation for rate changes came in September following Prime Minister Narendra Modi’s announcement in August. Of the 453 goods reviewed, 413 saw a rate decrease and only 40 an increase. Nearly 295 goods now have a new GST rate of 5 per cent/NIL, down from 12 per cent. This rationalisation has progressively lowered the effective weighted average GST rate from 14.4 per cent at the time of inception to 11.6 per cent in September 2019, with expectations that it will fall further to 9.5 per cent following the current changes.
Seek compensation
Given the anticipated revenue loss, both Balagopal and Mallu urged for a compensation mechanism for States. Their demand aligns with a prior call by eight Opposition-ruled States, which estimated their combined revenue loss from the cuts at ₹1.5 to ₹2 lakh crore. The States proposed levying an additional duty on sin and luxury goods beyond the proposed 40 per cent rate to maintain the current tax incidence, with the proceeds distributed among States. Mallu specifically complained that the additional levy collected on sin goods is retained by the Centre, and demanded that it be shared equally between the Centre and States.
Published on September 25, 2025