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The State Bank of India has said in its latest research report that changes in GST rates will cause only a limited revenue loss of about INR 3,700 crore, which is much lower than the government's initial estimate of INR 48,000 crore annually. The report mentions that the impact on fiscal deficit will be negligible as growth and higher consumption are expected to balance the shortfall. The simplified GST structure, replacing four slabs with two, is also likely to reduce inflation, improve compliance, and support cost efficiencies in sectors like banking.
The State Bank of India, in a research report released earlier this week, has said that the reduction in GST rates will lead to a revenue loss of about INR 3,700 crore. This figure is considerably lower than the government's earlier assessment of INR 48,000 crore per year. According to the report, the shortfall will not affect the fiscal deficit because higher economic activity and increased consumption are expected to offset the loss. Advertisement
The GST Council, during its 56th meeting held a few days ago, decided to replace the earlier four-tier system with a simpler two-tier structure. The new framework sets a 5 percent rate on essential goods and an 18 percent standard rate for most goods and services, while continuing with a 40 percent levy on a small set of de-merit items such as luxury or sin goods.
The SBI report further noted that the changes will be positive for the banking sector, as a simpler system will bring down costs and make compliance more efficient. Over time, the effective average GST rate, which stood at 14.4 percent when GST was first introduced in 2017, is expected to come down to about 9.5 percent. At the time of implementation in 2017, GST was introduced with four rates 5 percent, 12 percent, 18 percent, and 28 percent.
The rationalisation has also significantly lowered the tax burden on essential items. Nearly 295 such items have seen rates reduced from 12 percent to either 5 percent or zero. Because of this, inflation in the category is expected to ease by about 25 to 30 basis points in the current financial year. The report also highlighted that the broader impact of the new structure may moderate overall CPI inflation by around 65 to 75 basis points in the coming years, particularly by 2026-27.
The government has noted in the past that earlier revisions in GST rates led to higher tax collections instead of losses, with revenues increasing by nearly INR 1 trillion after previous changes. The SBI analysis points out that the current round of reforms is not just about rate cuts but is aimed at creating a more stable structure that encourages better compliance and supports long-term revenue growth.
Source PTI
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