Govt finances unlikely to be hit by proposed GST rate cut :analysts

The government’s finances are unlikely to come under strain from the proposed cut in goods and services tax (GST) rates, analysts said, adding that the move could instead boost consumption and support long-term fiscal revenues.Prime Minister Narendra Modi recently announced that GST reforms, including a two-rate structure, will be implemented by Diwali. The new structure would replace the current four main slabs of 5%, 12%, 18% and 28% with a simplified two-tier system of 5% and 18%.
While this would lower the effective rate of GST collections, analysts believe the broader benefits of improved compliance, fairer accounting processes, and higher consumption will more than compensate for any immediate revenue shortfall.“It’s still very early days to see the actual fiscal impact, but we don’t think that the government would reform this system to the point that it would hit fiscal revenues,” said YeeFarn Phua, Director, Sovereign & International Public Finance Ratings at S&P Global, during a recent webinar on India’s ratings upgrade.On August 14, S&P Global upgraded India’s long-term sovereign credit ratings, citing the country’s economic resilience, low inflation, and steady fiscal consolidation. A day later, the Prime Minister announced the GST rationalisation plan, including lower rates by Diwali.
SBI Research: Revenue Losses Likely to Be Offset
According to SBI Research, any revenue loss from lower GST rates could be countered by a pickup in consumption and cess adjustments. “Fiscal deficit for FY26 unlikely to be breached. Debt market fears thus appear somewhat myopically overblown,” SBI Research said in a note.The research estimates that the weighted average GST rate could fall to 9.5% following the proposed rationalisation, from 14.4% when GST was introduced in 2017. Even so, it expects the move to have positive spillover effects on growth and inflation. “Since the GST rate of essential items (food, cloth, etc.) is expected to decline from 12% to 5%, the CPI inflation in this category may also come down by 10–15 basis points after considering a 60% pass-through effect on food items,” SBI noted. The rationalisation of service tax rates is also expected to reduce CPI inflation by an additional 5–10 basis points. “Overall, we believe CPI inflation may be moderated in the range of 20–25 basis points,” it added.
Current vs Proposed Structure
At present, GST 1.0 has four major slabs—5%, 12%, 18%, and 28%—along with special rates such as 3% on gold, silver, and jewellery; 1.5% on cut and polished diamonds; and 0.25% on rough diamonds. A compensation cess is also levied on items like tobacco, aerated drinks, and motor vehicles to make up for state-level revenue shortfalls.The proposed GST 2.0 would simplify the system by moving to just two slabs—5% and 18%—which analysts believe will not only streamline compliance but also stimulate demand in key sectors.With global rating agencies, domestic research houses, and the government aligned on the potential long-term benefits, the GST reforms are being seen as a critical step toward fiscal consolidation and economic expansion ahead of the festive season.

(Business Correspondent)