India’s Goods and Services Tax (GST) collection for August 2025 paints a sort of mixed picture ahead of the crucial GST council meeting on September 3 and 4. The GST collection rose 6.5 per cent year-on-year in August to touch Rs 1.86 lakh crore. However, it was lower than the Rs 1.96 lakh crore that was collected in July.
Despite, the month-on-month dip, overall GST collections have been on a good footing and indicate India’s economic resilience, at a time the 50 per cent import tariffs announced by the US administration are a worry for India’s exporters.
Crucially, the GST council meets this week, and on agenda is simplifying the tax structure, rationalising the rates with two main slabs of 5 per cent and 18 per cent, along with a higher rate of 40 per cent on luxury and sin items.
“The growth in domestic GST collections is due to a growth in collections in almost all major states like Maharashtra, Karnataka, Haryana etc., with all these states clocking 10 per cent growth in revenue collections. However, on a month-on-month basis, the gross GST collections have shown a decline of 4.8 per cent and it would be an important input for the GST council for assessing revenue loss as it considers the GST rate rationalisation proposals later this week,” said Karthik Mani, partner – indirect tax at BDO India.
There is a broad expectation among the industry that the GST rates will come down for a wide range of goods from passenger cars to fast moving consumer goods. This, along with the interest rate cuts done by the Reserve Bank of India and the reduction in income tax announced in the Budget in February, should give India’s consumption a much needed boost, at a time there are pressures on exports.
But, there is also a growing concern among states over declining GST revenues. Several Opposition-ruled states, who met recently, have pointed that the proposed GST reforms could lead to a revenue loss of up to Rs 2 lakh crore.
A report anchored by Soumya Kanti Ghosh, member of the 16th finance commission and group chief economic adviser at State Bank of India, notes the rate rationalisation is likely to result in stronger revenue collections, validated by historical trends.
When the GST regime was launched, states were assured that a 14 per cent increase in their annual revenue for five-years of the transition period between July 1, 2017 to June 30, 2022 will be protected and also guaranteed that any revenue shortfall would be made good through compensation cess on luxury and sin goods.
According to Ghosh, the states have been provided Rs 9.14 lakh crore as compensation post GST implementation for the entire five-year transition period. This amount, he pointed, was at an aggregate basis, almost Rs 63,265 crore more than the projected amount that states were estimated to get from the assured 14 per cent increase.
He estimates that in FY26 as well, states will remain net gainers from GST collections, even under the proposed rate rationalisation.
“This is because of the unique revenue-sharing architecture of the tax. First GST is shared equally between centre and states, with each receiving 50 per cent of the collections. Under, the mechanism of the tax devolution, 41 per cent of the Centre’s share flows back to the states,” said Ghosh, adding that for around every Rs 100 of GST collected, states ultimately accrue Rs 70.50.
The SBI research department’s projections for the current financial year indicate that states are expected to receive at least Rs 10 lakh crore in SGST and additionally Rs 4.1 lakh crore through devolution and thereby making them net gainers.
Earlier evidence of GST rate changes in 2018, 2019 suggests there may be a temporary adjustment phase followed by stronger inflows.
“While an immediate reduction in rates can cause a shart-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,’ said Ghosh.
The gains will accrue even when not taking into account the additional consumption boost due to the rate rationalisation, he pointed.
“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 Ghosh.
According to credit ratings agency ICRA, actual SGST collections in the current financial year ending March 2026, will be impacted by the proposed changes in GST slab rates. But, how much will be the revenue impact will depend on multiple factors.
“If consumers defer discretionary purchases to avail expected lower tax rates after rationalisation, near-term consumption may get compressed. The timing of such changes, the extent of alteration in consumer behaviour, and the final rate structure will determine the potential revenue loss, if any, for states in FY2026 and beyond,” said ICRA.
According to the ratings agency, it is currently unclear if the surplus in the GST compensation fund, it estimates it at Rs 48,000 crore, will be shared with states this year and whether the cess will be continued to be levied after rate rationalisation, up to March 2026, for compensating states for potential revenue loss.