Budget 2026: In meeting with FM Sitharaman, states flag revenue loss after GST cuts

Union Finance Minister Nirmala Sitharaman on Saturday chaired a pre-Budget meeting with states and Union Territories (UTs), where participants raised concerns over revenue losses after GST rationalisation, borrowing constraints, and Centre–state funding patterns. The GST cuts were introduced last September.

The meeting was attended by the Governor of Manipur; Chief Ministers of Delhi, Goa, Haryana, Jammu and Kashmir, Meghalaya and Sikkim; Deputy Chief Ministers of Arunachal Pradesh, Madhya Pradesh, Odisha, Rajasthan and Telangana; Finance Ministers of 17 states and Union territories; and representatives of two states. Officials from the finance ministry's Departments of Economic Affairs, Expenditure and Revenue were also present.

The Indian Express reported that revenue losses accruing to states following the GST rate cuts featured prominently in the discussion. States including West Bengal, Telangana, Punjab, Kerala and Karnataka reportedly flagged the sharp drop in their tax collections after the cuts.

Several states reiterated that while they had backed the GST rate reductions as a pro-people measure, the absence of compensation has narrowed their fiscal room. Many sought a share in the collections from excise duty on tobacco and cess on paan masala, levies that replaced the GST compensation cess.

West Bengal Finance Minister Chandrima Bhattacharya said the impact of GST rationalisation was discussed at length, with states questioning the current fiscal arrangement. He said the GST rate cuts have resulted in decline in revenues of states. "Many states asked for inclusion of the cess and surcharge in the divisible pool, the collection from cess on paan masala should also be shared with states. After all, it is the states which are collecting these levies, but these are being taken away from them," Bhattacharya told IE.

Karnataka's Revenue Minister Krishna Byre Gowda said his state was facing a shrinking fiscal space amid GST changes, rising social commitments, climate-related shocks and rapid urbanisation. According to him, post-GST rate cuts, Karnataka's GST growth has fallen from 12 per cent to 5 per cent, resulting in a Rs 5,000 crore shortfall this year and Rs 9,000 crore annually.

"While the Centre has offset its loss through cess on pan masala and excise on tobacco, states lack similar flexibility," he was quoted as saying. Gowda called for a 50:50 sharing of excise duty on tobacco and cess on paan masala to restore fiscal equity and cooperative federalism.

Kerala Finance Minister KN Balagopal said state governments were struggling to finance growth and development as their fiscal powers continued to erode. "The immature implementation of GST, cessation of GST compensation and RD grants, conditions attached to the CSS, newer restrictions in borrowing, and reduction in the inter se share from the divisible pool are major concerns to the fiscal space of the state governments, especially Kerala," Balagopal said.

Kerala also sought a special fiscal correction package to bridge a severe resource gap of over Rs 21,000 crore arising from the current year's borrowing constraints.

Goa raised concerns around sustaining infrastructure momentum and called for a more equitable Centre–state funding pattern under centrally sponsored schemes. Goa Chief Minister Pramod Sawant, in a post on X, said he had placed his state's perspectives, demands and developmental requirements before the finance minister.

States also pressed for simplified conditions for capital expenditure and 50-year interest-free loans, renewed focus on investment promotion, and flexibility in borrowing norms.

The Union finance ministry said several participants highlighted the importance that the Scheme for Special Assistance to States for Capital Investment (SASCI) be continued with higher allocations as it helps in fast-tracking asset creation and supports capital investments in the states and UTs.

"It is worth mentioning that since 2020-21, the Union Government has released more than Rs 4.25 lakh crore as 50-year interest-free loans to the States under SASCI," the finance ministry said.