Siddaramaiah urges PM Modi to compensate states for GST revenue loss

Bengaluru, Dec 5 (PTI) Karnataka Chief Minister Siddaramaiah on Friday once again flagged his demand that the Centre compensate states for the revenue loss arising from GST rate rationalisation, warning that the trend poses a serious threat to state finances.

In a letter to Prime Minister Narendra Modi, Siddaramaiah said the base year for revenue collections may be fixed at 2024-25, grossed up for collections under the compensation cess, noting that this would reflect the revenue potential of the States.

"Throughout this process, states have acted with complete faith and in full spirit of cooperative federalism by accepting the Union's rationalisation proposals in their entirety. We remain hopeful that the Union will reciprocate and ensure that the fiscal interests of the states are protected by compensating the states for the revenue loss," he said.

The Chief Minister also urged Modi to consider giving states a 50 per cent share of the revenue collected through the pan masala cess, arguing that the current arrangement undermines fiscal autonomy.

By contrast, Siddaramaiah said, the Union is likely to be revenue-positive as it has exercised fiscal levers available exclusively to it, such as levying excise duty on tobacco and imposing a cess on pan masala While tobacco remained under central excise as part of the 2017-18 grand bargain introducing GST, pan masala is "unequivocally a GST-leviable item", he argued, adding that levying a cess on such an item departs from the principle of a harmonised tax framework.

Referring to media reports that the Centre proposes to share part of the pan masala cess proceeds with states through a centrally sponsored health scheme, Siddaramaiah said such an arrangement would limit states' autonomy.

Given that pan masala squarely falls within the GST base, Siddaramaiah said the associated revenue should flow to states as part of the GST framework, rather than being channelled through a centrally sponsored scheme.

"While we fully endorse that tax incidence on pan masala should not come down, the imposition of a cess deprives states of their rightful share of revenue. I would urge that the Government of India consider a mechanism of sharing this revenue 50:50 with states," he said.

Karnataka's earlier submission at the 56th GST Council meeting had warned that states would face a revenue loss of 15-20 per cent of their GST receipts due to rate rationalisation and the non-merger of compensation cess into the GST system.

According to him, the data now confirms that these apprehensions were well-founded. Gross GST collections for November 2025-26 have recorded 2 percent decline, compared to a robust 9.3 percent growth in November 2024.

For the period from September to November, the months impacted by rationalisation, the year-on-year growth slowed to 3.3 per cent, compared to 9 per cent in the same period last year.

He noted that the net domestic GST growth rate for the three-month period stood at 1.7 per cent, sharply lower than 8.9 per cent in the previous year, a "huge seven percentage point decline." If the trend continues, the country may register net GST collections of Rs 14.6 lakh crore in 2025-26 against the estimated Rs 15.5 lakh crore, leaving a shortfall of Rs 85,000 crore in the current year alone, he said.

The gap for the full year could rise to Rs 1.2 lakh crore, he warned.

Siddaramaiah said the impact on states would further deepen due to a likely reduction in their devolution share. Even the festive month of October -- typically marked by high consumption during Dasara and Deepavali, showed negative growth, indicating difficult months ahead, he added.

He pointed out that Karnataka's GST numbers also reflect this pattern of severe reduction in GST collections, with the state reporting 3.1 per cent growth in net GST collections during September-November.

Based on current trends, Siddaramaiah said the State foresees a revenue shortfall of Rs 5,000 crore this year, rising to Rs 9,000 crore for the full financial year. This does not include an additional estimated loss of Rs 9,500 crore due to the non-merger of the compensation cess, he said.

"This financial strain is predominantly being borne by the states," he added. PTI AMP SA