GST Rate Rationalisation To Boost India's GDP Growth By 0.4-0.6% In 12 Months: Economists

PM Modi on Independence Day announced the next generation GST reforms, expected by Diwali, rationalizing the tax rates and boosting consumption. As per the Centre’s proposal, the existing 12% and 28% GST slabs will be scrapped entirely, while retaining the 5% and 18% tax slabs.

The move is expected to boost nominal GDP growth by 0.6% over 12 months, according to Gaura Sengupta, chief economist at IDFC First bank. Indirect tax cut have greater impact on growth due to wider reach than direct tax cut. There is expected to be rise in durable goods consumption due to reduction in GST rates, she added.

With most items in 12% and 28% slab moving to lower tax structure of 5% and 18% respectively, demand for two-wheelers and entry level cars (28%) and other essentials (12%) should increase, said Sameer Narang, Head- Economics Research group at ICICI bank.

The overall boost to consumption via lower GST rates is around Rs 1.4 trillion or about 0.4% of GDP, Narang estimated. "Lower GST rates is a big boost for sentiment and consumption in H2 and thus should drive improvement in demand and thus direct tax collection which have under-performed in Q1", he added. Narang estimates GDP growth at 6.3% for FY26.

With most of the items in 12% slab moving to 5% slab going forward, most of the tax collection will be now in 18% tax slab. The tax rejig is a big positive for India’s domestic consumption and should bring effective tax rate even lower from current ~11%, Narang said.

Out of the total GST collection of Rs 22.08 lakh crore in FY25, cess contribution was Rs 1.5 lakh crore. Out of the remaining, as much as Rs 15 lakh crore was contributed by 18% tax slab and Rs 2.9 lakh crore by 28% slab, Narang estimated. This slab moves to 18% apart from few goods which move to 40% slab and likely cess on sin-goods.

This implies the total benefit in terms of rate reduction in this segment should be around Rs 0.7 lakh crore, Narang estimated, adding that if the entire 28% slab moves to 18%, then the benefit is likely to be Rs 1 lakh crore. In case of 12% slab, the overall revenue generated is Rs 1.2 lakh crore and most of it is likely to move to the lower slab implying a revenue impact of Rs 0.7 lakh crore.

Thus the overall impact of GST revision is around Rs 1.4 lakh crore which is 0.4% of GDP. Lower prices should increase affordability and spur consumption growth and encourage formalization of economy, he explained. In terms of policy mix, the consumption and growth push from rejig is a big positive, he said, retaining the growth forecast of 6.3% given external headwinds.

The fiscal impact this year is only 0.2% of GDP for centre and states, according to Narang, who added that there are fiscal levers such as excess inflows in GST compensation fund, disinvestment and higher RBI dividend next year.

On inflation, impact is estimated at around 50 basis points seen in core goods with around 8% of the basket likely to see a reduction in price, Narang said. "This is positive for our FY27 CPI estimate of 4.7%."

Out of the remaining, as much as Rs 15 trillion was contributed by 18% tax slab and Rs 2.9 trillion by 28% slab. Now this slab moves to 18% apart from few goods which move to 40% slab and likely cess on sin-goods. This implies the total benefit in terms of rate reduction in the segment should be around Rs 0.7 trillion. If the entire 28% slab moves to 18%, then the benefit is likely to be Rs 1 trillion.

In case of 12% slab, the overall revenue generated is Rs 1.2 trillion and most of it is likely to move to the lower slab implying a revenue impact of Rs 0.7 trillion. Thus, the overall impact of GST revision is around Rs 1.4 trillion which is 0.4% of GDP. The same is split between Centre and States and thus annualized impact is 0.2% for each with impact over half of year limited to 0.1% for each.