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GST Rate Cuts Don’t Hurt Collections, Says SBI Report Citing Historical Data
Moneylife Digital Team 03 September 2025
Economy & Nation
Countering concerns that rationalising goods and services tax (GST) rates would dent revenue collections, an analysis by State Bank of India (SBI) on GST 2.0 argues that experience shows rationalisation tends to strengthen revenues over time, with the Union and state governments emerging as net gainers due to the unique revenue-sharing structure of the indirect tax system. Meanwhile, the 56th GST Council meeting, beginning Wednesday under the chairmanship of Union minister of finance Nirmala Sitharaman, is set to debate a sweeping two-slab structure that could lower taxes on over 150 items.
 
SBI’s research points to earlier GST rate adjustments in July 2018 and October 2019 which saw only a temporary dip of about 3%–4% in monthly revenues or roughly Rs5,000 crore. Collections quickly rebounded with sustained growth of 5%–6% month-on-month (m-o-m). Over time, rationalisation translated into additional revenues estimated at nearly Rs1trn (trillion).
 
 
“Evidence shows that rationalisation is less about short-term stimulus and more a structural reform,” the report notes, highlighting gains such as a simplified tax system, reduced compliance burdens and higher voluntary compliance that widens the tax base.
 
A central argument in SBI’s note is that the constitutional architecture of GST ensures states are not disadvantaged. GST collections are split equally between the Union government and the states, but 41% of the Union government’s share flows back to states through tax devolution.
 
"This means that out of every Rs100 collected, states accrue nearly Rs70.5—making them the biggest beneficiaries of GST." In fact, SBI estimates that in FY25-26, states are set to receive around Rs10 lakh crore in state GST (SGST) plus Rs4.1 lakh crore via devolution, even before factoring in consumption gains from rationalisation.
 
Since the launch of GST in July 2017, states were guaranteed 14% annual revenue growth for five years, funded through a compensation cess on sin goods like liquor, tobacco, and coal. By the end of the transition in June 2022, states had received a total of Rs9.14 lakh crore in compensation, Rs63,265 crore more than the projected amount they were entitled to under the 14% revenue growth assurance.
 
Even during the COVID-19 crisis, the Union government borrowed and released Rs2.69 lakh crore to plug shortfalls, ensuring that state finances remained protected.
 
SBI projects that a rationalised effective GST rate of 9.5% would itself yield an additional Rs52,000 crore in FY25-26, shared equally between the Union government and states. States like Uttar Pradesh, Bihar, West Bengal and Maharashtra are projected to see significant increases in collections post-rationalisation, underscoring the argument that simplification leads to buoyancy rather than erosion, the report says.
 
The report also urged the GST council to look beyond rate rationalisation and consider deeper structural reforms. These include bringing petroleum, electricity and aviation turbine fuel under GST in the medium term, using the expected Rs50,000 crore surplus in the compensation cess fund by end-2025 to cushion states during rationalisation, fixing the inverted duty structure that blocks businesses from using input tax credits and deploying technology to introduce pre-filled returns, faster refunds and smoother registrations to cut compliance costs.
 
SBI’s conclusion is clear: GST rationalisation should not be seen as a short-term revenue risk but as a step towards greater efficiency, compliance, and long-term buoyancy. “The institutional framework of fiscal federalism ensures that states remain net gainers even in conservative scenarios,” the report emphasises, aligning the reform with the government’s vision of a streamlined, business-friendly GST.
 
Meanwhile, the 56th GST council meeting chaired by finance minister Sitharaman and attended by state finance ministers, is expected to take up one of the biggest reforms since the launch of the tax regime. The Union government has proposed moving towards a simplified two-slab structure of 5% and 18%, with a special 40% rate on a limited set of items. This involves shifting products currently taxed at 12% and 28% into lower categories, aiming to reduce the burden on households, encourage consumption, and support small businesses.
 
According to reports, the proposals include expanding the nil GST category to cover daily essentials such as loose paneer, khakhra, pizza bread, chapati, and roti, alongside ready-to-eat foods like paratha and parotta. Other items under consideration for cuts include butter, condensed milk, jams, nuts, namkeens, mushrooms and dates which may move from 12% to 5%. 
 
Urban consumers and younger demographics could benefit from lower GST on cocoa chocolates, pastries, ice-cream and breakfast cereals. Education-related supplies such as maps, globes, notebooks and lab materials may also be moved to the zero-tax bracket, easing costs for families. Additionally, the Centre has suggested reducing GST on entry-level cars and two-wheelers to 18%, making them more affordable ahead of the festive season.
 
The recommendations will be presented during the two-day meeting beginning Wednesday, with a revised structure likely to be implemented by 22 September 2025, subject to council approval.
 
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