Centre, states stare at fiscal tensions from India's big tax cut proposal
Indian Prime Minister Narendra Modi’s surprise move to lower consumption taxes within three months is set to spark tough negotiations with states, who will have to shoulder the bulk of the revenue losses.
Modi proposed a major rejig of the complex goods and services tax last week, a move many businesses had been pushing for since the system was rolled out in 2017. Stocks rallied as investors bet lower taxes on everyday goods would boost consumer spending and help offset the drag on economic growth from higher US tariffs.
The tax proposals — which still need to be approved — are expected to squeeze government revenue, especially for state governments. Economists such as Gaura Sen Gupta at IDFC First Bank estimate the total cost to the exchequer at Rs 1.8 lakh crore ($20.7 billion) annually, with the federal government facing a net revenue hit of about 0.15% of the gross domestic product and states incurring losses of roughly 0.36% of GDP.
The uneven hit is likely to sharpen fiscal tensions between New Delhi and the states, which have sparred with Modi’s government over revenue-sharing in the past.
Some states say they were not adequately compensated for losses when the GST was introduced, leaving them with limited ways to raise revenue on their own. Harpal Singh Cheema, the finance minister of Punjab, told reporters on Wednesday that his state has been losing 210 billion rupees annually since the introduction of the GST, and called for a new mechanism to compensate states for such losses. Wealthier opposition-ruled southern states have also long argued that much of the tax revenue they generate is diverted north, where Modi’s ruling party holds greater sway.
