India's GST Overhaul: A Rs 1.1 Trillion Revenue Shift

The fiscal cost of the government's proposed Goods and Services Tax (GST) rate rationalisation will remain manageable, with an estimated revenue loss of Rs 1.1 trillion annually or 0.3% of the GDP, a UBS report said.

Stimulating Consumption Through GST Cuts

The report highlighted that a GST cut would be more powerful in stimulating consumption than personal income tax or corporate tax cuts, since it directly affects spending at the point of purchase. Citing a study by the National Institute of Public Finance and Policy, it pointed out that the GST multiplier stands at -1.08, higher than the multipliers for personal income tax (-1.01) and corporate tax (-1.02).

Upcoming Next-Gen GST Reforms

Prime Minister Narendra Modi announced upcoming next-gen GST reforms before Diwali that would benefit consumers, small industries, and MSMEs. The finance ministry unveiled its plan for a simplified two-tier GST structure, centred on three pillars: structural reforms, rate rationalisation, and ease of living.

Proposed Changes to GST Slabs

Sources reveal that the Centre is proposing to scrap the existing 12% and 28% slabs, keeping only 5% and 18% GST rates. Luxury and sin goods will be taxed at a higher 'special slab rate' of 40%. This change is expected to benefit sectors like processed foods, garments, footwear, and construction materials.

End of Compensation Cess

Another significant change is the end of the compensation cess, initially imposed to make up for state revenue shortfalls. This will conclude ahead of the March 2026 deadline, creating fiscal room for the government to align GST rates within the new system.

Deflationary Effect and Monetary Policy Easing

Lowering GST rates would have a deflationary effect, helping to cool inflation and opening the way for further monetary policy easing. With price pressures already soft, UBS predicted the repo rate could settle in the 5.0–5.25% range, leaving scope for another 25–50 basis points cut during the rest of FY26.