GST 2.0 reforms: What it means for Kerala’s revenues and consumers

Eight years after the rollout of the Goods and Services Tax (GST), India is preparing for its biggest tax overhaul. The GST Council is weighing a shift from the current four-slab system introduced in 2017 to two main rates of 5 per cent and 18 per cent, along with a steep 40 per cent slab for luxury and sin goods. The GoM of state ministers on Thursday accepted the Centre's proposal to move to a two-slab structure.

The move is expected to reshape consumption and revenue distribution in the country. In 2024–25, GST collections touched a record ₹22.08 lakh crore, up 9.4 per cent year on year. While the Centre argues that simplification will improve compliance and boost revenues, experts caution about short-term disruptions.

Currently, GST has four slabs: 5, 12, 18 and 28 per cent. Under the proposed system, the 12 per cent bracket would merge with 5 per cent, and the 28 per cent bracket with 18 per cent, except for luxury and sin goods, which would move to 40 per cent. This could make mid-range goods cheaper while raising prices of premium items and also fix issues like inverted duty structure. 

So, what does this mean for Kerala and the country in general?

1. Consumption impact
An SBI Research report estimates that rate rationalisation could initially cost the exchequer about ₹85,000 crore but generate ₹1.98 lakh crore in additional consumption, translating into a 0.6 per cent GDP boost. With income tax cuts in FY26, the combined effect on household spending could touch ₹5.31 lakh crore, or 1.6 per cent of GDP, the report says.

For a consumer-driven state like Kerala, the impact will be pronounced. “Kerala is a consumer state. Households might see price shifts in everyday goods, depending on how the restructuring is finalised. Consumer durables such as refrigerators, washing machines and cars, currently taxed at 28 per cent, could become more affordable, boosting middle-class spending. Tobacco and alcohol may face higher taxes under the 40 per cent slab,” banking and finance expert S Adikesavan told Onmanorama News Brake.

“However, large purchases may be deferred until GST 2.0 is rolled out, especially during the festive season,” he added.

2. Revenue risks
Kerala’s dependence on GST, its largest source of tax revenue, makes it vulnerable to structural changes. Traders may also delay passing on rate cuts to consumers, creating transitional shortfalls. According to SBI Research, states could see an average annual GST revenue loss of ₹85,000 crore. Disruptions are expected in 2025–26, but collections are projected to rebound from 2026–27 as consumption picks up.

From GST’s launch in 2017, the revenue-neutral rate has already dropped from 15.8 per cent to 11.4 per cent. The states which could not achieve the 14 per cent annual growth in revenue were compensated for the shortfall till March 2022. It is upon the GST Council to decide if a compensation package needs to be worked out for the states to overcome this time’s shortfall.

3. Lotteries under scrutiny
Another contentious proposal is to bring lotteries into the 40 per cent sin tax bracket. Lotteries contribute significantly to Kerala’s revenue. According to the State budget figures, the total revenue generated from lottery ticket sales was ₹13,244 crore for the financial year 2024–25. The state has already asked its GST Department to study the fallout. Meanwhile, Kerala Finance Minister K N Balagopal, who sits on the six-member ministerial panel on GST restructuring, is expected to argue against the steep hike when the panel meets in New Delhi.

As GST 2.0 takes shape, Kerala faces a delicate balance. On one hand, households could benefit from cheaper consumer durables and a boost in disposable income, potentially driving growth. On the other hand, the state risks revenue shocks, especially if lottery taxation is tightened and GST compensation is not assured. Kerala has consistently complained about losing ₹20,000–25,000 crore in IGST settlements since 2017, and the Finance Minister has demanded that states receive 60 per cent of GST revenues instead of the current 50 per cent. With both consumption gains and fiscal pressures in play, much will depend on how the GST Council addresses states’ concerns in the months ahead.