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Informist, Monday, Aug. 18, 2025

 

NEW DELHI – India's proposed overhaul to the Goods and Services Tax system, where four tax slabs may be reduced to two, could help lift economic growth amidst trade-related uncertainties, economists said. The rationalisation of GST rates can also bring down inflation.

 

The central government has proposed a two-slab GST structure with 5% and 18% rates in its recommendations to a group of ministers constituted by the GST Council, Informist reported Friday. Prime Minister Narendra Modi in his Independence Day speech announced that GST reforms will take place by Diwali.

 

The rates rejig, the biggest since 2018, comes at a time when the Indian economy faces risks from the tariffs imposed by the US. The US has imposed 25% tariff on goods imports from India, which is scheduled to rise to 50% from Aug. 27. If the levy rises to 50%, India's GDP growth could fall by around 50 basis points, economists have projected.

 

The Reserve Bank of India projects India's GDP growth at 6.5% in the current financial year, the same as 2024-25 (Apr-Mar). Economists project GDP growth around 6.3%, and a potential hit from US tariffs could lower growth to below 6% this year.

 

GST rate rationalisation could help increase GDP growth by around half a percentage point, economists said. "Rationalisation of GST rates should boost discretionary consumption by meaningfully lowering prices for end consumers," Morgan Stanley said in a report. "Importantly, reductions in GST rates could help reduce the burden on low-income households the most given indirect tax structures are regressive in nature."

 

Economists at Morgan Stanley estimate GDP growth could rise 50-70 bps on an annualised basis thanks to the impact of rate rationalisation. "To be sure, in the near term until clarity on new GST rates emerges, there will likely be an adverse impact as consumers defer their consumption spending." IDFC FIRST Bank Chief Economist Gaura Sen Gupta estimated a 60 bps increase in nominal GDP growth from the proposed rate rationalisation.

 

The Centre has proposed bringing 99% items under the 12% tax slab to the 5% slab while some items may be put under the 18% slab, Informist reported, citing a senior government source. Almost 90% items from the 28% tax slab will go to the 18% tax slab. Currently, 65% of the total GST revenue comes from items falling under 18% tax slab and 11% revenue is collected from items under 28% slab. Only 7% and 5% GST is collected from items under 5% and 12% tax slabs, respectively, the source said.

 

INFLATION IMPACT

 

The GST rate rejig is also expected to bring down inflation along with providing a growth bump, with economists projecting around 50 bps fall in CPI inflation over a 12-month period, assuming companies completely pass on the benefit of lower GST rates on products. The RBI projects FY26 CPI inflation at 3.1% but sees it rising to 4.9% in the first quarter of FY27.

 

"We estimate around 8% of the CPI basket should see a reduction in prices with price decline of around 6-8% which implies a reduction of around 50 bps in CPI concentrated in core goods CPI," ICICI Bank said in a report. "Since the benefit this year is for a part of the year, around half of this should be visible in CPI this year and remaining half next year. This should bring our CPI inflation estimate for FY27 lower from the current 4.7%."

 

A GST rate cut would lower inflationary pressures and could increase the probability of further easing of monetary policy by the RBI, UBS Securities Chief India Economist Tanvee Gupta Jain said in a report. The RBI has lowered the repo rate by 100 bps so far in 2025, and left it unchanged earlier this month. UBS sees space for 25-50 bps of more rate cuts in the rest of FY26 to support growth.   End

 

Reported by Shubham Rana

Edited by Deepshikha Bhardwaj

 

 

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