Lowering GST rates could potentially result in a financial loss of approximately ₹45,000 crores in the fiscal year 2026
The State Bank of India (SBI) has published a research report on August 19, 2025, outlining the potential effects of India's next-generation GST reforms. The proposed reforms, which aim to rationalize GST rates and introduce two basic slabs of 5% and 18%, along with a 40% slab for certain sin goods, are expected to have a significant impact on the Indian economy.
According to the SBI report, the reforms could reduce retail inflation (CPI) by 20–25 basis points. This reduction is due to a combination of factors, including a decline in the effective weighted average GST rate from the current 14.4% to around 9.5%. This decrease in the overall tax burden is expected to stimulate consumption growth, offsetting the estimated annual revenue loss of ₹85,000 crore.
The proposed GST structure will shift from the current four slabs (5%, 12%, 18%, 28%) to two basic slabs of 5% and 18%, with a 40% slab for 5–7 sin goods. This rationalization will lead to essential goods like food and clothing moving from a 12% GST to a 5% rate, resulting in an approximate 10–15 basis point reduction in food inflation. Additional reductions in inflation are expected from the services rate rationalization, totalling a CPI inflation drop of around 20-25 basis points overall.
Despite the potential revenue loss, the increase in consumption and improved tax buoyancy is expected to generate an additional GST revenue of ₹52,000 crore. This revenue will be shared equally by the Centre and the States, with each receiving ₹26,000 crore. The Centre's ability to exceed projected tax revenues historically provides room to accommodate these reforms without materially worsening the fiscal deficit.
The SBI report concludes that the reforms are likely to reduce inflationary pressure on consumers while preserving fiscal prudence. The overall positive economic multiplier effect, driven by higher consumption and tax buoyancy, is projected to support GDP growth by about 0.6% without compromising price stability or fiscal health.
The GST Council is expected to meet between September 16 and 19 to give final recommendations on the new rates. The new rates are expected to come into effect from October. The estimated consumption boost due to the GST cut is approximately ₹1.98 lakh crore, and the rationalisation of GST rates has the potential to boost consumption without much impact on the fiscal deficit.
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