India's GST cuts risk delay as states demand safeguards for revenue loss
Indian Prime Minister Narendra Modi's plans for sweeping tax cuts are at risk of facing a delay as states governed by key opposition parties have sought compensation for any revenue loss from the planned changes.
In a rare move, Modi used his Independence Day speech to announce sweeping goods and services tax (GST) cuts on household items and "aspirational" goods, calling it a Diwali gift ahead of the October festival.
Economists see the tax cuts as a way to balance the likely economic impact of punitive US tariffs on India.
POTENTIAL REVENUE LOSS
The federal government's proposal of a two-rate tax structure of 5 per cent and 18 per cent, with some luxury and sin goods such as cigarettes taxed higher at 40 per cent, has broadly been accepted by states, but they are now wrangling to protect revenues after the tax changes.
The proposals could lead to a substantial revenue loss and hurt welfare and development spending, said a statement issued by eight states, including Tamil Nadu, Himachal Pradesh, West Bengal, and Kerala, among others, after a meeting on Friday.
They estimated the revenue loss at Rs.1.5 trillion ($16.67 billion) to Rs.2 trillion per year, adding that states will bear over 70 per cent of that loss.
"If states lose 20 per cent of GST revenue, it will destabilise the fiscal structure of state governments across the country," said Krishna Byre Gowda, revenue minister for the southern Indian state of Karnataka.
The federal government has not shared any estimate of the revenue the exchequer will have to forgo due to tax cuts. However, economists estimate it at Rs.1.1 trillion- Rs.1.8 trillion.
