The tax system in India is undergoing a significant shift, as announced by the Goods and Services Tax (GST) Council following its 56th meeting. The government is pushing ahead with key GST Reforms to simplify the tax structure.
The four-tier GST structure will be reduced to only a two-rate system of 5% and 18%, along with a special "de-merit" rate of 40% for certain specified goods/services.
Out of the 453 goods being examined, 413 will have a lower GST. Only 40 will have a higher GST. Traders and businesses are closely following the latest GST News for compliance updates.
The recent GST Council Meeting focused on rate revisions and new policy measures. In addition, a significant number of items have been reclassified, with close to 295 of the 12% tax items now classified as 5% or NIL.
Soumya Kanti Ghosh, Group Chief Economic Advisor at SBI, said the reform secures an effective weighted average GST rate of 9.5% down from 11.6% in 2019, and significantly lower than the 14.4% that was reported when GST was first implemented.
The most immediate macroeconomic impact is expected on retail inflation. As essential goods move to lower tax brackets, consumer prices are expected to trend lower. Analysts say CPI-based inflation could fall by 25-30 basis points in FY26, based on food items alone, with a pass-through rate of 60%.
In terms of services, the rationalized tax rates could reduce inflation by an additional 40-45 basis points, based on a 50% pass-through to consumers. In total, CPI inflation could be reduced by about 65-75 basis points over FY26-27, providing relief before the festive season.
Lower CPI numbers leave the Reserve Bank of India (RBI) with more options and flexibility in its monetary policy. While a weaker inflation forecast might typically pave the way for interest rate cuts, analysts are still somewhat cautious.
Analysts are awaiting the RBI Policy Outlook to assess its impact on inflation and growth. BofA Securities has indicated that the RBI is unlikely to reduce the repo rate immediately and will instead adopt a data-dependent approach. Nonetheless, the GST reform creates room for a more accommodative stance if growth pressures intensify.
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On the fiscal side, the GST overhaul is expected to have a manageable impact. Madhavi Arora, Lead Economist at Emkay Global Financial Services, estimates that the reform could add around 0.6% to annual domestic demand, particularly benefiting the FMCG, consumer durables, and automobile sectors.
The Department of Revenue anticipates stronger consumption trends and lower input tax credit outflows to balance revenue pressures. The fiscal adjustment burden will fall more heavily on states, while the Centre’s deficit is projected to remain broadly on track. BofA Securities continues to forecast a fiscal deficit of 4.4% of GDP for FY26.
The GST restructuring is a bold initiative aimed at simplifying India's indirect taxes. Tax reform may bring macroeconomic benefits through lower consumer prices, increased demand, and greater monetary flexibility.
Rising concerns over the Fiscal Deficit have sparked debates on government spending. While fiscal pressures exist in the short term, the reform is widely viewed as growth-supportive and inflation-friendly, encouraging an enhanced consumption cycle moving forward.