On September 5, 2025, a major overhaul of India’s Goods and Services Tax (GST) system sent ripples through the country’s political and economic landscape, with the GST Council announcing a rationalisation of tax slabs that has drawn both praise and pointed criticism from leaders across the spectrum. While the reforms were largely welcomed as people-friendly and potentially transformative for consumers and small businesses, concerns over state revenues and the spirit of cooperative federalism surfaced swiftly and forcefully.
In Tamil Nadu, the response encapsulated the national mood: a blend of cautious optimism and fiscal apprehension. State Finance Minister Thangam Thennarasu, who represented Tamil Nadu at the Council’s 56th meeting in New Delhi, struck a balanced tone. "Exemptions on insurance and simpler registration for small businesses are welcome," Thennarasu stated, according to The Times of India. He also expressed support for the automated sanction of provisional funds for exports, the correction of the inverted duty structure, and a simplified registration mechanism for small and low-risk businesses—measures that are expected to ease compliance and stimulate economic activity at the grassroots.
Yet, Thennarasu did not shy away from highlighting the fiscal risks these changes could pose for states. He recommended either continuing the existing cess provision through a constitutional amendment or amending the GST Act to raise the bound rate only for so-called 'sin' and luxury goods. "There are fiscal implications for states," he warned, pressing for the full implementation of the Committee of Officers’ report on Integrated GST (IGST) settlements to streamline the process and protect state revenues.
Thennarasu’s concerns found echoes in other states, particularly those ruled by the INDIA bloc. Kerala’s Finance Minister K N Balagopal estimated a potential annual revenue loss of ₹8,000 crore to ₹10,000 crore for his state due to the rationalisation. "The Left Democratic Front government supports the rate cuts, but the central government should ensure that the benefits are passed on to the consumer," Balagopal told Business Standard. He added that the issue of compensation for states was not taken up seriously during the meeting, even as Kerala’s consumption basket—heavily weighted toward items with higher GST rates—meant the state would suffer disproportionately compared to the national average.
Kerala also made a specific plea regarding lottery taxation, a key revenue source. The state requested that the 28% GST rate on lottery be retained and that state-run paper lottery be excluded from the rationalisation proposal, which would otherwise hike the rate to 40%. Balagopal further called for the states’ share of GST collections to be increased to 60% to offset the anticipated losses.
The Congress party, meanwhile, amplified the states’ demands for an extension of compensation by another five years, with 2024-25 as the base year. Describing the reform as "GST 1.5," the party stated that the wait for a "true GST 2.0" continued. Former Finance Minister P Chidambaram was particularly blunt, telling The Hindu, "The reduction in rates is welcome but eight years too late. The current design and high rates ought not to have been introduced in the first place. We said this in 2017, but government did not listen. Now, after years of burden on households, they reversed course." Chidambaram also questioned whether the timing of the reforms was linked to economic concerns or electoral calculations, calling the overhaul a "U-turn."
In contrast, leaders from the Bharatiya Janata Party (BJP) and its allies greeted the reforms with enthusiasm. AIADMK general secretary Edappadi K Palaniswami called the rationalisation "historic," praising the shift in tax slabs and the relief for healthcare, agricultural inputs, and insurance. "The ‘Next Gen GST' move will simplify compliance, boost consumer confidence, and support economic growth," Palaniswami asserted, as reported by The Hindu. Tamil Nadu BJP state president Nainar Nagenthran described the reform as a "Diwali gift," adding, "This reform strengthens rural livelihoods, lowers costs of essentials, and supports farmers with reduced rates on machinery and bio-pesticides."
Other BJP-led state governments echoed this sentiment. Gujarat Chief Minister Bhupendra Patel said the new GST rates would improve the "ease of living" for everyone. Delhi’s Chief Minister Rekha Gupta lauded the move to set a nil GST rate on health insurance and educational items, as well as the support for renewable energy, which she noted would benefit Delhi’s solar initiatives. Madhya Pradesh’s Mohan Yadav welcomed the reduction of GST from 12% to nil on educational materials such as charts, pencils, globes, and notebooks, and the cut from 18% to 5% on agricultural equipment—changes he said would directly help students and farmers.
Andhra Pradesh Chief Minister N Chandrababu Naidu described the changes as "pro-poor and growth-oriented," predicting broad benefits for all sections of society. Assam Chief Minister Himanta Biswa Sarma went even further, hailing the new GST rates as a "super booster" for the Indian economy. He argued that the reforms would bring agility to small and medium businesses, spur job creation, drive consumption, and—perhaps most importantly—leave more money in the hands of ordinary people.
Support for the reforms was not limited to politicians. Several organizations affiliated with the Rashtriya Swayamsevak Sangh (RSS), including the Swadeshi Jagran Manch, Bharatiya Mazdoor Sangh, and Laghu Udyog Bharti, issued statements lauding the government for reducing GST rates. They argued that these changes would help micro, small, and medium enterprises as well as farmers, potentially providing a much-needed boost to rural economies.
Despite the broad support for the reforms, the debate over revenue sharing and compensation remains unresolved. The Congress party and several state finance ministers have insisted that extending compensation is essential to uphold the spirit of cooperative federalism. As the Congress put it, "One key demand of the states, made in the true spirit of cooperative federalism, remained unaddressed." Kerala’s Balagopal, for his part, was adamant that the central government needed to act, warning that the annual revenue loss from just four sectors—cement, electronics, auto, and insurance—was estimated at ₹2,500 crore, with the broader impact being even more severe for states like his.
While the GST Council’s decision marks a turning point in India’s tax regime—simplifying compliance, reducing rates on essentials, and offering targeted relief—the challenge of balancing fiscal federalism with national economic goals is far from over. States are now looking to the central government for concrete assurances on compensation and a greater share of GST collections, even as businesses and consumers begin to adjust to the new regime. The coming months will reveal whether this "Next Gen GST" can truly deliver on its promise of fairness, simplicity, and growth for all.
