Now 2 slabs instead of 4; How much profit and loss will the government incur from the new GST? understand math

Goods and Services Tax (GST) has now completely changed. Earlier it used to have 4 slabs but now there will be only 2. Earlier there were slabs of 5%, 12%, 18% and 28%. Now there will be only 5% and 18% slabs. Apart from this, there will also be a slab of 40%, which will be imposed on cigarettes, tobacco and luxury items. These new GST rates will come into effect from September 22.

With the new GST, things used by the common man in his daily work will become cheaper. From food items to small vehicles and insurance, it will become cheaper.

The opposition says that the new GST will cause losses. The states had demanded compensation from the Centre. However, the central government argues that as things become cheaper, consumption will increase and this will compensate for the deficit. Finance Minister Nirmala Sitharaman said that to compensate for the loss, 28% GST as well as compensation cess will be imposed on beedi-cigarettes and betel-tobacco.

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What does the government have to say on the loss?

Due to the changes made by the government in GST, tax on many things will now be reduced.

Till now the things which used to attract 28% GST will now attract only 18%. Similarly, those things which were taxed at 12% or 18% till now, will attract 5% GST. At the same time, there are many things which were earlier under the ambit of 5% GST, now there will be no tax on them.

Revenue Secretary Arvind Srivastava said that this change will cause a loss of Rs 48 thousand crore. He further said that ‘it would not be right to call it revenue loss.’

Less taxes will mean more money in the hands of the common man and he will spend more, which will have a direct impact on the economy.

The government believes this will be financially sustainable. He said that this will bring a boom in the market. He further said that no major financial impact is expected from this.

…but will there be any loss?

The government is believing that by reducing taxes, money will come and expenditure will increase, which will grow the economy. The government also believes that there will be more consumption and this deficit will be compensated in some time.

However, states say that changes in GST will lead to loss of revenue. Before the GST Council meeting, the Finance Ministers of 8 states ruled by opposition parties – Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana and West Bengal had held a meeting. These states argue that tax changes will reduce revenue.

Jammu and Kashmir Chief Minister Omar Abdullah said that this will reduce their revenue by 10 to 12 percent. He said that the tourism sector has been adversely affected due to the Pahalgam attack. He has appealed for help from the Centre. He said that how can we believe that the reform in GST will reduce the tax burden on the common man and things will become affordable for him.

Jharkhand Finance Minister Radhakrishna Kishore says that due to changes in GST, his state is expected to suffer a loss of Rs 2 thousand crore annually.

He claimed that there was a loss of Rs 16,408 crore from 2017 to 2024-25 and by 2029 it could increase to Rs 61,670 crore. He said that Jharkhand has the highest production of coal and steel but 75% to 80% of it is consumed in other states. Therefore, those states get the benefit of GST received from it. He demanded that the Central Government should provide assistance of at least Rs 2 thousand crore annually.

After this meeting, the eight states had issued a joint statement saying that due to the changes in GST, there is an estimated loss of Rs 85 thousand crore to Rs 2 lakh crore annually.

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How much loss can there be?

On August 19, SBI had released a report on the impact of GST reforms. It was told that changes in GST could lead to a loss of up to Rs 1.1 lakh crore annually.

SBI had done the calculations for this. SBI had told in the report that currently the government gets 6% revenue from GST from the 5% slab. 5% of revenue comes from 12%, 74% of revenue comes from 18% and 15% of revenue comes from 28% slab. Understand it like this, if a person is getting Rs 100 from GST, then Rs 6 out of it comes from 5%, Rs 5 from 12%, Rs 74 from 18% and Rs 15 from 28% slab.

SBI had given two scenarios in its report and had estimated the loss accordingly. SBI had said that now since there will be only two slabs and a 40% tax will be imposed on luxury items, hence if it is assumed that the government gets 11% revenue from 5% slab and 84% revenue from 18% slab and 5% revenue from 40% tax, then it can lead to a loss of up to Rs 1.1 lakh crore annually.

In the second scenario this loss will be slightly less. It was estimated that if the government gets 11% revenue from GST from 5% slab, 82% revenue from 18% slab and 7% revenue from 40% slab, then in this situation there could be a loss of up to Rs 60 thousand crore annually.

On the basis of both the scenarios, SBI had estimated that due to changes in GST, the government may suffer an average loss of up to Rs 85 thousand crore annually.

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How will it be compensated?

When GST was implemented on July 1, 2017, the central government had promised to compensate the states. The states were to receive this compensation for 5 years. Its expiry date was completed in June 2022. However, the government extended it by 4 more years till 31 March 2026.

Compensation cess was imposed to compensate the losses incurred by the states due to the implementation of GST. This compensation cess is levied on luxury items and things like betel-tobacco, beedi-cigarettes. It ranges from 1 to 290%. The revenue that the Center gets from this was distributed to the states.

Now when the slab in GST has been reduced from 4 to 2, the states are afraid of losses due to this. However, the central government is saying that the loss will be compensated in a few years due to increase in consumption.

But how is the central government saying this? Actually, India’s economy is highly dependent on consumption. The contribution of consumption to the country’s GDP in 2024-25 was 61.4%. Now the government hopes that due to reduced taxes, people will spend more which will benefit the economy. Economists believe that after two years of implementation of the new GST, there may be a growth of 0.5% in GDP.

SBI report has estimated that in 2025-26, all the states can get revenue of Rs 10 lakh crore from State GST i.e. SGST. Along with this, Rs 4.1 lakh crore will also be received from the Central Government.

The central government does share GST. Along with this, 41% of its tax is also shared with the states. SBI report says that 50 percent of GST is received directly by the states. Apart from this, 41% share is also received from central tax. According to this, out of every Rs 100 received from GST, state governments directly get Rs 70.5.