Who Benefits and Who Loses from the New GST Rates? Why States Are Already Worried – and Should You Be Too?

#News Bureau August 21, 2025

GST Reform 2.0 and States: The proposed two-tier GST rate structure could cost major states an annual loss of ₹7,000–9,000 crore. On the other hand, experts argue that exemptions under GST, compared to income tax, will benefit the common people.

The proposed Goods and Services Tax (GST) reform has raised serious concerns among Indian states. Under the new two-tier GST structure, larger states are projected to lose around ₹7,000 to ₹9,000 crore in revenue every year. According to officials, the revised GST system could be implemented from the middle of the current financial year. Prime Minister Narendra Modi has described the reform as a Diwali gift for the people, while experts believe that the new GST slabs will offer greater relief to common citizens compared to income tax benefits.

However, state governments argue that their financial position is already under pressure due to limited sources of revenue. A major revenue shortfall, they warn, could directly impact social welfare schemes and administrative spending.

As per state estimates, revenue growth after the GST reforms could fall to just 8 percent, compared to 11.6 percent a few years ago and nearly 14 percent before the original GST rollout in July 2017. This declining growth trend has intensified state-level apprehensions, making GST Reform 2.0 one of the most debated economic issues in recent years.

Big Tax Reform: New GST Structure, Who Wins and Who Loses

India is set for a major tax overhaul with the introduction of a new Goods and Services Tax (GST) framework. The government is considering replacing the current four-tier system with just two slabs — 5% and 18% — while “sin goods” such as tobacco and liquor may be taxed at a much higher 40%.

One of the most significant shifts is the plan to move cement and white goods like refrigerators, washing machines, and other home appliances from the existing 28% slab down to 18%. For consumers, this change could mean lower prices, but for states, it raises alarm bells. Automobiles, cement, and white goods are among the highest revenue-generating categories for states, and a reduction in tax rates could lead to a sharp fall in their collections.

Economists estimate that the new GST reform could result in a revenue loss of nearly 0.4% of India’s GDP annually, with states bearing most of the burden. If the new structure comes into effect from October 2025, the Centre’s income for FY 2025-26 could also take a hit, amounting to nearly 0.2% of GDP. Madhavi Arora, Chief Economist at MK Global Financial Services, noted that “this change will also put pressure on the Centre’s revenue. In the first quarter itself, GST collections rose only 5% against a 13% target set in the Union Budget.”

Resistance is also visible on the proposal to increase the tax on tobacco from 28% to 40%. Despite the Centre’s assurance that the overall effective tax, including cess, will remain around 88%, several states argue that this could further erode their revenue base.

For states already struggling with limited income sources, any reduction in GST revenue poses a direct threat to their ability to fund development projects. State governments are urging the Centre to find a balanced formula so that reforms benefit citizens without destabilizing finances.

For households, however, the changes bring clear advantages. A cut in GST will make everyday purchases cheaper, from groceries and medicines to appliances and vehicles. Unlike income tax, which impacts only about 6% of Indians who file returns, GST affects almost everyone, as it is levied on daily consumption. This makes GST reform far more relevant to the average citizen than income tax relief. Chartered accountant Siddharth Surana explained, “GST is a consumption-based tax and has no link to income class. It directly impacts every transaction, big or small.”

Currently, GST is divided into four slabs — 5%, 12%, 18%, and 28%. Under the new system, there will only be two slabs: 5% and 18%, with sin goods like tobacco, liquor, and pan masala attracting 40%. Essential goods such as packaged food items, ghee, butter, fruit juices, coconut water, and medical equipment are expected to fall under the 5% category,

bringing relief to households. Meanwhile, products like cement, air conditioners, televisions up to 32 inches, two-wheelers, and small cars, which are currently taxed at 28%, will likely move to the 18% bracket, making them significantly more affordable.

The GST 2.0 reform, therefore, promises cheaper goods and greater savings for consumers, but at the same time, it raises serious concerns about fiscal stability and the ability of states to sustain development spending. While households may welcome lower taxes, the political and financial tug-of-war between the Centre and states is bound to intensify as the government moves closer to implementing this ambitious reform.