GST reset, income tax relief seen lifting GDP by up to 0.9%, says Kotak, fiscal pressure appears limited

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The GST rationalisation, coupled with income tax adjustments, could add 0.7-0.9 percent to GDP on an annualised basis, thus softening current macro headwinds, Kotak Institutional Equities has estimated in a note, arguing that the sharp reset of indirect tax slabs - effective September 22 - will expand household purchasing power with only a modest cost to the exchequer.

Citing media calculations, Kotak has noted a revenue loss of about Rs 93,000 crore from lower GST rates, partly offset by Rs 45,000 crore from the new 40 percent slab on luxury and sin goods. The abolition of compensation cess on most products adds further relief, pushing the projected annualised household benefit close to Rs 1.8 trillion, or roughly 0.6 percent of GDP.

Kotak added that the fiscal pressures appear contained, and with the net GST impact limited to roughly Rs 48,000 crore on the FY24 consumption base, Centre’s deficit targets look achievable and recent volatility in government bond yields may ease. Equity markets have already reacted to many consumer-linked shares which have re-rated after early signals of the reform, the report mentioned.

The GST Council has compressed most slabs into two core rates of five percent and 18 percent, reserving 40 percent for high-end items. Tobacco alone will continue to attract compensation cess until borrowing obligations are cleared, likely by end of 2025.

Mass market segments stand to gain the most, owing to lower effective tax rates on two-wheelers, entry-level passenger vehicles, major consumer durables, staples and health insurance. These tax benefits are expected to stimulate volumes if producers pass on the tax cuts.

Heavy materials such as cement are expected to see little change.

Kotak’s note said the timing is critical, as the nominal private final consumption expenditure has grown only 9.2 percent on-year in FYTD26, while elevated US tariffs have shaved an estimated 0.3 percent from the GDP growth rate. Kotak Institutional believes the tax measures will cushion this weakness and provide direct support to household demand in the months ahead.