States to get Rs 10 lakh crore in SGST, Rs 4.1 lakh crore via devolution despite rate rejig: SBI Research

States will remain net gainers from GST collections in FY26 even under the proposed rate rationalisation--and are expected to receive at least Rs 10 lakh crore in SGST plus Rs 4.1 lakh crore through devolution, an SBI Research report said on Tuesday.

This is because of the unique revenue-sharing architecture of the tax. First, GST is shared equally between the Centre and the States, with each receiving 50 per cent of the collections. Second, under the mechanism of tax devolution, 41 per cent of the Centre's share flows back to the states.

States’ share adds up to nearly 70% of GST revenues

“Taken together, this means that out of every Rs 100 of GST collected, states ultimately accrue nearly Rs 70.5--approximately 70 per cent of total GST revenues,” the report noted.

The gains accrue even without factoring in the additional consumption boost due to rate rationalisation. At a 9.5 per cent effective GST rate, this translates into a revenue gain of Rs 52,000 crore --Rs 26,000 crore each to the Centre and states.

Past rate cuts show revenues rebound after dip

According to the report, evidence from earlier rounds of GST rate changes--such as those in July 2018 and October 2019--suggests that rationalisation does not necessarily weaken revenue collections.

“Instead, the evidence points to a temporary adjustment phase followed by stronger inflows. While an immediate reduction in rates can cause a short-term dip of around 3–4 per cent month-on-month (roughly Rs 5,000 crore, or an annualised Rs 60,000 crore), revenues typically rebound with sustained growth of 5–6 per cent per month,” the report mentioned.

States compensated during transition period

At the time of the launch of the GST regime, states were assured of a 14 per cent annual revenue growth for the first five years (July 1, 2017 to June 30, 2022). Any shortfall was to be covered through a compensation cess on luxury goods and sin products such as liquor, cigarettes, tobacco products, aerated water, automobiles, and coal.

As decided by the GST Council, states were provided a total of Rs 9.14 lakh crore in compensation to protect their tax revenues during the transition period. This was almost Rs 63,265 crore more than what states were projected to receive from the assured 14 per cent increase, the report highlighted.