New Delhi: The proposed Goods and Services Tax (GST) restructure will lead to substantial revenue loss for states, leading to reduced welfare and development spending, ministers and representatives from eight states who met in the national capital on Friday to discuss the proposed tax reform decided to inform the GST Council.

As such, the GST rate cuts should be backed by a compensation scheme by the central government, they said.

These states have also decided to urge the GST Council to ensure that businesses should pass on the tax benefit to consumers, instead of profiteering.

Kerala finance minister K.N. Balagopal, who was part of the meeting, told Mint, "The benefit of GST relief must be passed on to the final consumer by businesses. The tax rate rationalisation proposals involve huge revenue losses to states and hence they should be compensated."

Balagopal is also a member of the ministerial group set up by the GST Council, which last week approved the GST rate rationalisation proposal. The other states that attended Friday's meeting are Himachal Pradesh, Jharkhand, Karnataka, Punjab, Tamil Nadu, Telangana and West Bengal.

Separately, in a statement, Balagopal said, "All eight states are eager to work with the Union government and the other state governments to ensure that GST rate rationalisation exercise results in beneficial outcomes for all the stakeholders."

All ministers and representatives who were present at the meeting voiced serious concerns about the substantial revenue loss that may arise from the GST restructure, the statement said.

Rate compression

The tax rate restructure proposals mainly include compressing the four-rate GST structure into a two-rate regime, with most of the products and services getting shifted to lower slabs.

Accordingly, a range of goods from cars to kitchenware may turn cheaper. The central government's proposal is to implement the change before Deepavali in order to boost demand for goods and services in the economy.

Currently, GST is applied in four slabs - 5%, 12%, 18% and 28%. The plan is to eliminate the 12% and 28% slabs.

Also, the 'compensation cess' levied on luxury items and so-called sin goods like tobacco and caffeinated beverages in the 28% slab will be eliminated. States are now insisting on introducing a fresh duty on some of the items that attracted the cess so that their revenue loss could be minimised. They are also of the view that proceeds of such a duty should be fully transferred to states, which are already experiencing rising fiscal stress alongside an erosion of fiscal autonomy.

The eight states are expected to place half a dozen suggestions before the GST Council when it meets in the capital on 3 and 4 September, said a second person, who is also privy to the developments.

The states believe that GST rate rationalisation should be supported by a robust revenue protection framework. "States' revenue loss must be fully compensated through a scheme similar to the GST compensation cess," said the person, who spoke on the condition of anonymity.

The Centre should guarantee 14% annual revenue growth for states, the person said, adding that compensation for any revenue loss should be assured for a minimum of five years, beyond which it may be reviewed based on GST buoyancy.