While the incoming GST reforms have been hailed by the industry, businesses, and people, there has also been concern about the massive revenue losses that the Indian economy will eventually have to face.
According to an SBI Research report, the proposed GST reforms will have a net positive impact on the Indian economy.
During his Independence Day speech made at the Red Fort, Prime Minister Narendra Modi had announced the launch of a shake-up of the GST reforms, to be rolled out by Diwali this year.
As per the new GST regime overhaul, the tax structure will be reduced from four-tier to two-tier, with only the 5 per cent and 18 per cent tax slabs remaining.
The report estimates an average annual revenue loss of around ₹85,000 crore resulting from the reforms, with the figure for FY26 projected at ₹45,000 crore.
Also Read: GST overhaul may make cars, ACs, cell phones cheaper
However, a way around this, says the report, is to shift luxury or ‘sin’ goods from the current 28 per cent tax slab to a higher 40 per cent slab.
The silver lining, says the report, is that the reforms will drive a consumption boost of ₹1.98 lakh crore since a lot of products are expected to turn cheaper after they’re moved from the 18 per cent sab to the 5 per cent tax slab.
When combined with an accompanying tax cut, the report forecasts a total additional consumption expenditure of ₹5.31 lakh crore in the economy, equivalent to 1.6 per cent of GDP.
This overall surge in spending is expected to generate an additional ₹52,000 crore in GST revenue in FY26, more than offsetting the projected loss for that year. The report also says that the final outcome of the GST reforms is expected to result in higher economic growth, increased tax collections, and lower inflation.
Analysts had earlier expressed concerns that the government’s fiscal projections could be compromised if borrowing increases to offset revenue losses from GST tax cuts. However, SBI Research countered this doubt saying, “Fiscal deficit for FY26 is unlikely to be breached. Debt Market fears thus appear somewhat myopically overblown.”
On the inflation front, the report said the GST rate on essential items, including food and clothing, is expected to decrease from 12 per cent to 5 per cent. This may lead to a reduction in CPI inflation in this category of 10–15 basis points.
Meanwhile, the rationalisation of GST rates for services will result in a 5-10 basis points reduction in CPI inflation for other goods and services, factoring in a 25 per cent pass-through effect. Overall CPI inflation is expected to be moderated by 20 to 25 basis points, it noted.
Follow us
