The GST Council’s unanimous confirmation of GST rate simplification is a substantive growth-positive reform and a multi-pronged economic catalyst. A huge Diwali gift as was promised, hitting multiple targets with one single arrow. The rationalisation of the GST rates has been carried out keeping in mind 3 key objectives viz. a) spurring mass consumption, b) improving the ease of doing business and c) partially offsetting the impact of higher US tariffs.
The benefits of the GST rationalisation are likely to be felt through higher disposable income, lower inflation and improving consumer sentiment providing the much needed impetus to overall consumption demand. The rates announced by the GST Council have been aimed largely at items of mass and essential consumption bringing those goods to lower rates of 5 percent and 18 percent, even while select luxury and sin goods are proposed to be taxed are at 40 percent, effective from September 22, 2025.
The full pass through of rates may as per estimates lead to annualized household savings of around Rs 1.8 lakh crore (~0.6 percent of GDP) and may result in an uptick in consumption items’ volumes, subject to demand elasticities. From a sectoral perspective, key segments such as automobiles, footwear, consumer goods/staples, parts of retail, consumer appliances, cement among others, all benefit positively.
The rationalization of GST was however not limited to lower and lesser tax rates. Some of the inverted duty structures were corrected for sectors such as textiles and fertilizer. Moreover, plans were laid out for easier GST registration, pre-filled returns, and quicker refunds. These changes will likely lead to improvement in the ease-of-doing-business.
The rationalisation of GST has been undertaken without compromising on fiscal prudence and does not disturb the path of fiscal consolidation. This is indeed commendable. The compensation cess fund, which served several purposes since the inception of the GST regime will be closed around September (or when the GST bonds are fully repaid). The items in the compensation cess bucket will be moved to the 40 percent GST bracket, making it regular GST revenue to be shared by the centre and state government. This has been a key step for ensuring that the fiscal cost of tax cuts is not too high.
Details show that the gross revenue loss from the tax cuts is about Rs 93,000 crore on the consumption base of FY24. Revenues folded from the compensation cess to the 40 percent tax bracket can fund Rs 45,000 crore of the loss, leaving a net loss of Rs 48,000 crore which is 0.16 percent of GDP. Thus, we believe that the fiscal cost can be easily contained, especially for the central government. The revenue loss is also much lower than earlier consensus economist estimates which were in the range of Rs 1.5-1.6 lakh crore.
Overall, the GST rate rationalisation along with process improvement demonstrates the Government’s urgency and intent to strengthen the GST framework and boost demand in the economy. Finally, it is also important to put the GST cuts in a broader context of policy measures undertaken to boost growth, these include the income tax cuts announced in the Union Budget as well as the 100bps lowering of policy rates by RBI in CYTD. Taken together, these steps amount to a substantial boost to the economy.
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