The newly announced modifications to the Goods and Services Tax (GST) structure will take effect on September 22nd. This pivotal change is poised to significantly lower the prices of various daily essentials, including butter, chocolate, shampoo, tractors, and air conditioners. The previous tax slabs of 12% and 28% will be eliminated, resulting in a streamlined system that introduces two revised categories: a reduced rate of 5% and a standard rate of 18%. In total, the GST rates for 453 products and services have been revised under this initiative. Specifically, tax rates for 413 goods will experience a reduction, while 40 products will see an increase in their tax rates. Notably, 295 items that were previously subjected to a 12% tax rate will now fall under the 5% rate or even be completely exempt from tax.
The government’s decision to lower these tax rates is projected to lead to a significant net revenue loss of approximately Rs 48,000 crore. Experts anticipate that such a reduction could potentially widen the fiscal deficit by an estimated 10 to 40 basis points within the current financial year. However, research conducted by the Economic Research Department of the State Bank of India (SBI) suggests that the anticipated revenue loss may be manageable. The reasoning is that lowering tax rates is likely to stimulate consumer spending, leading to increased purchases and a rise in the number of taxpayers contributing to the GST revenue. SBI’s analysis suggests that the actual loss may be limited to around Rs 3,700 crore, resulting in a negligible impact on the fiscal deficit.
In the long run, this tax reform is expected to foster job creation, stimulate economic activity, and enhance individual savings rates, which could subsequently lead to increased consumer expenditure. As private consumption rises, the government may find itself needing to allocate fewer resources towards stimulating economic activity, allowing for a decrease in capital expenditure. If the government maintains its existing level of capital expenditure, estimates suggest that the fiscal deficit impact could be approximately 20 basis points. Furthermore, a modest reduction of 5% in capital expenditure might limit this impact to around 5 basis points. Conversely, if the government refrains from cutting capital expenditures and simultaneously accommodates the entire revenue deficit, including any state-related shortfalls, this could result in a potential impact of up to 40 basis points on the fiscal deficit.
The modifications in the GST framework are projected to significantly enhance the Gross Domestic Product (GDP) growth rate for the current financial year. Current forecasts indicate that the GDP may expand at a more robust rate of approximately 6.7% to 6.8%, surpassing the Reserve Bank of India’s previous estimate of 6.5%. With fewer than six months remaining in the financial year, GDP growth for FY 2026 is anticipated to be modest, potentially expanding by only 10 to 20 basis points. This optimism is further bolstered by the impressive GDP growth rate of 7.8% recorded in the first quarter of the ongoing financial year, reinforcing the likelihood of achieving a higher overall growth rate.
A key component of the GST alterations is the planned reduction in tax rates, which is expected to have a deflationary impact, thereby alleviating inflationary pressures. For instance, reducing the GST on a category of 295 essential goods from the current rate of 12% to either 5% or 0% is estimated to result in a decrease in food prices of approximately 25 to 30 basis points. Likewise, a reduction in the rates applied to various services could bring down inflation in additional products and services by an estimated 40 to 45 basis points. Consumer non-durable goods are also poised to gain from this adjustment in GST rates, as the reduction is likely to make these essential items more affordable.
However, it’s important to note that the influence of this reform on the bond market is expected to be modest. The anticipated revenue shortfall resulting from the GST adjustments is likely to be absorbed within the framework of the current budgetary expenditures, mitigating any significant disruptions in the financial markets.
The disinflationary effects stemming from the reductions in GST slabs and rates present a favourable scenario for monetary policy, as they will create an environment conducive to maintaining lower interest rates over an extended timeline. This shift is anticipated to alleviate the strain of elevated price levels, potentially allowing the Reserve Bank of India to endorse a decrease in policy rates during forthcoming reviews by the Monetary Policy Committee (MPC).
During the monetary review conducted in August, the central bank projected that average inflation would stabilise at around 4.4% by the fourth quarter of the financial year 2026, a notable decline compared to the earlier estimate of 4.9% for the first quarter of the upcoming financial year. Simultaneously, the Reserve Bank has forecasted retail inflation at about 3.1% for the financial year 2025-26. It’s worth mentioning that the MPC has already implemented a 100 basis points cut in the repo rate since February, suggesting further reductions may be on the table if inflation remains manageable. Nonetheless, any decisions regarding additional rate cuts will also hinge on the extent to which US tariffs impact the Indian economy in the future.
The analysis reveals a noteworthy trend in the average GST rate, which has consistently declined over time. When GST was first implemented, the average tax rate stood at approximately 14.4%. By September 2019, this rate had decreased significantly to around 11.6%, and further reforms may potentially lower it to approximately 9.5%. This trend is poised to alleviate the tax burden for everyday citizens, making basic goods and services more affordable.
The adjustments in GST slab rates will also have a positive impact on the operational costs of banks and corporations. For instance, the removal of GST on insurance premiums means that health and life insurance policies will become less expensive. As a result, individuals are likely to purchase more insurance coverage, while those already holding policies may opt for higher coverage limits. Additionally, commodities such as hotel accommodations, office equipment, and medical supplies will see a reduction in costs, benefiting banks and businesses alike by enhancing their profit margins.
One sector that stands to gain immensely is the healthcare and insurance industry. Previously, GST ranged from 4% to 18% on insurance premiums, but the elimination of this tax will simplify the process and reduce costs for consumers seeking insurance. This change is expected to attract new policyholders into the insurance market, thereby expanding the reach and relevance of insurance products among the general populace.
Moreover, the repercussions of the reduced GST rates will extend beyond individual consumers, positively influencing the broader industry landscape. A decrease in GST is likely to drive demand for essential equipment, such as compressors, displays, and semiconductors. As a result, companies supplying these items can expect heightened business activity. Small and medium-sized enterprises, particularly those engaged in sectors such as plastics and wiring, will experience increased project opportunities, paving the way for expansion and growth. This surge in business opportunities is anticipated to generate new jobs, fostering inclusive development and enhancing overall economic stability.
In summary, the GST reform represents a strategic initiative not merely aimed at reducing tax rates but also as a pivotal step towards fortifying the nation’s economy in the long run. By facilitating smoother business operations, curbing inflation, lowering healthcare and insurance expenses, and ultimately improving the quality of life for the average citizen, these reforms hold the promise of transformative impacts across various sectors of society.
Satish Singh is a Senior Columnist based in Mumbai, and the opinions expressed in the article are personal.
