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However, an analysis by SBI Research highlights that the proposed GST 2.0 reforms will leave states as clear beneficiaries. The study projects that even after the compensation cess is phased out, the unique revenue-sharing design of the Goods and Services Tax will ensure stronger inflows for state governments.
States set to remain net gainers after GST 2.0: SBI Research
The GST collections are divided equally between the Centre and states, along with that 41% of the Centre’s share is devolved back to the states. “Taken together, this means that out of every Rs 100 of GST collected, states ultimately accrue nearly Rs 70.5,” the report noted.The report projects that “States remain net gainers in FY26 even after the proposed GST rate rationalization.”
States likely to receive ₹14.1 lakh crore in FY26 under GST 2.0: SBI Research
“Our projections for FY26 indicate that states are expected to receive at least approx Rs 10 lakh cr in SGST plus Rs 4.1 lakh crore through devolution thereby making them net gainers.” SBI Research estimates. It highlights that even without factoring in a consumption boost from rationalisation, states remain on the winning side.
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At an effective GST rate of 9.5%, rationalisation could add an extra Rs 52,000 crore in revenues, split equally between the Centre and states even without factoring consumption boost. Uttar Pradesh, Bihar, West Bengal and Maharashtra are expected to see the biggest jumps in collections.
Revenues may dip temporarily by 3–4% month-on-month: SBI research
Past experience with GST rate cuts in 2018 and 2019 highlightnthat revenues may dip temporarily by 3–4% month-on-month. However, collections usually bounce back with 5–6% monthly growth, eventually delivering additional inflows of nearly ₹1 trillion.
“Importantly, rationalisation should be seen less as a short-lived stimulus to demand and more as a structural measure that simplifies the tax system, reduces compliance burdens, and enhances voluntary compliance, thereby widening the tax base,” said SBI Research.
States guaranteed 14% annual revenue growth under GST in 2022
The report highlight that when GST was introduced in July 2017, states were promised a 14% annual growth in revenues for the first five years. Any shortfall was to be covered through a compensation cess levied on luxury and sin goods such as liquor, tobacco, automobiles and coal.
During the transition period that ended in June 2022, states received a total of Rs 9.14 lakh crore in compensation. This was Rs 63,265 crore more than the projected amount they were entitled to under the 14% growth guarantee. To cover gaps caused by the pandemic, the Centre also borrowed Rs 2.69 lakh crore in FY21 and FY22 and passed it on to states.
SBI recommends bringing petroleum, electricity, and ATF under GST
With the Centre on track to fully repay loans taken for compensation by November–December 2025, the report estimates a Rs 50,000 crore surplus in the compensation fund. This could be used to cushion states against any losses from rationalisation.
The SBI research also suggested that petroleum, electricity and aviation turbine fuel should be brought under GST over the medium term. Faster GST registration, pre-filled returns and quicker refunds can further ease compliance.
The report also called for resolving the inverted duty structure, where input tax rates are higher than output tax, as it creates working capital stress for businesses and pushes up consumer prices.