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Informist, Tuesday, Aug. 19, 2025

NEW DELHI – The government is likely to meet its fiscal deficit target for the current financial year even if its proposed overhaul of the goods and services tax regime leads to a revenue loss, State Bank of India said in a report. At most, the government's fiscal deficit could rise by 5 basis points because of the revenue foregone by the planned changes to GST rates, SBI's Group Chief Economic Advisor Soumya Kanti Ghosh said.

 

The government has targeted a fiscal deficit of 4.4% of GDP for 2025-26 (Apr-Mar), down from the 4.8?hieved in FY25. Bond market participants fear the government could miss its fiscal deficit target for the year because of the proposed changes to the GST regime, where the Centre aims to lower the number of rate slabs to two from the current four. Ghosh said that fears of the debt market appear "somewhat myopically overblown".

 

In his Independence Day speech, Prime Minister Narendra Modi announced that GST reforms will take place by Diwali. The Centre 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. Currently, there are four broad rate slabs, including 12% and 28%.

 

Earlier Tuesday, S&P Global Ratings said Indian government's revenues are unlikely to see a major hit from the proposed overhaul of the GST regime. Instead, if the proposed rate rationalisation is completed, it could boost the government's revenue in the long run.

 

According to SBI's Ghosh, the average revenue loss from the GST reform could be around INR 850 billion annually. For FY26, the revenue loss for the government could be INR 450 billion, half of which could be offset by the balance in the GST compensation cess fund. 

 

Ghosh said the balance in compensation cess fund is around INR 450 billion, from which INR 225 billion could be used to offset the potential revenue loss from changes to GST. The remaining INR 225 billion revenue foregone could "at best add 5 bps to Centre's fiscal deficit", Ghosh said.

 

"In the eventuality of no adjustment in revenue loss, Rs 45,000 crores (INR 450 billion) is likely to be more than compensated by the potential gain in revenue post the GST cut," Ghosh said. Changes to the GST regime could lead to a consumption boost of INR 5.5 trillion, and assuming an effective tax rate of 9.5%, the additional GST revenue would be INR 520 billion. This could be equally divided between the central government and states, Ghosh said.

 

SBI also expects CPI inflation to fall by 20-25 bps because of the proposed changes to GST. The Reserve Bank of India projects CPI inflation to average 3.1% in FY26. Retail inflation fell to 1.55% in July, the second-lowest ever print.  End

 

Reported by Shubham Rana

Edited by Ashish Shirke

 

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