GST Reforms Will Cause Rs 3,700 Crore Revenue Loss To Government: SBI Report

A recent research report by the State Bank of India (SBI) has assessed the fiscal implications of proposed Goods and Services Tax (GST) reforms, estimating a relatively minor revenue loss of Rs 3,700 crore for the government due to rate reductions. This figure contrasts with the government's own projection of a net fiscal impact amounting to Rs 48,000 crore on an annualised basis.

The SBI analysis, released on Friday, suggests that the reforms, which aim to simplify the tax structure and boost consumption, will not significantly strain public finances. Instead, it highlights potential benefits like economic growth stimulation and cost efficiencies, positioning the changes as a strategic move to enhance India's tax ecosystem without derailing fiscal stability. This comes amid ongoing efforts to rationalise GST rates, which have been a cornerstone of India's indirect tax regime since its introduction in 2017.

According to the report, the anticipated revenue dip is minimal when factoring in the expected surge in economic activity and consumer spending triggered by lower rates. It asserts that this loss will have negligible effects on the fiscal deficit, providing reassurance to policymakers as they navigate post-pandemic recovery and inflationary pressures. The reforms were deliberated at the 56th GST Council meeting, where the existing four-tier rate structure—comprising 5%, 12%, 18%, and 28%—was streamlined into a two-tier system.

This includes a standard rate of 18% and a reduced 5% rate for essentials, alongside a demerit rate of 40% applied to a select few goods and services, such as luxury items or sin goods. The overhaul is designed to make the tax system more equitable and less burdensome, particularly for lower-income groups, while maintaining revenue buoyancy through broader compliance and economic expansion.

The SBI report also underscores positive ripple effects on various sectors, notably banking. It predicts that rate rationalisation will lead to substantial cost efficiencies for banks, potentially improving lending capabilities and operational margins. Since GST's inception, the effective weighted average rate has already declined from 14.4% in 2017 to an expected 9.5% post-reforms, reflecting a progressive shift toward affordability. This reduction is particularly evident in essential items, with around 295 products seeing their rates drop from 12% to 5% or even zero, which could ease household budgets and stimulate demand. Economists view this as a consumer-friendly adjustment, aligning with the government's goal of fostering inclusive growth while curbing tax evasion through simplified slabs.

Also Read: Tax Cut Makes Renewable Installations More Affordable

On the inflation front, the report forecasts a moderating influence on the Consumer Price Index (CPI). The rationalisation of rates on essentials is projected to lower CPI inflation by 25-30 basis points in the current financial year, with an overall moderation of 65-75 basis points over 2026-27. This could provide relief amid global uncertainties, such as fluctuating commodity prices and supply chain disruptions, helping to stabilise living costs for millions. The analysis draws on historical data, noting how GST has evolved from a multi-tiered system to one that prioritises simplicity and efficiency, contributing to India's rise as a more attractive destination for investments.

Overall, the SBI's optimistic outlook on GST reforms emphasises their potential to drive long-term economic benefits without significant fiscal fallout. By minimising revenue losses and enhancing growth prospects, these changes could bolster India's position in the global economy, encouraging further reforms in taxation and public finance. As the government prepares to implement these measures, stakeholders will monitor their real-world impact on revenue collections, business sentiments, and consumer behaviour. 

Also Read: GST Council Hikes Tax on Oil, Gas Services