Proposed GST overhaul to cost government over Rs 1 lakh crore: Experts

The Goods and Services Tax reform announced by Prime Minister Narendra Modi during his Independence Day speech would cost the government over Rs 1 lakh crore annually, multiple economists said.

The proposed overhaul of the GST, through the removal of the 12 per cent and 28 per cent slabs with likely convergence into 5 per cent and 18 per cent standard rate, is expected to significantly impact the revenue of the Centre and the state governments.

According to Gaura Sen Gupta, chief economist at IDFC First Bank Economics Research, the revenue loss to the Centre and state governments is estimated at Rs 1.8 lakh crore (0.5 per cent of GDP) for 12 months. “The revenue loss to Centre (net of transfer to states) is estimated at 0.15 per cent of GDP and revenue loss to states is estimated at 0.36 per cent of GDP. The relatively lower burden on Centre is because state governments get not just SGST but also 41 per cent of CGST,” Gupta said.

Currently, there are five GST slabs — 0%, 5%, 12%, 18% and 28%. Majority of the GST revenue is collected at the 18 per cent slab at 70-75 per cent share. The slabs which are being removed account for a smaller share in overall revenue – 12 per cent slab accounts for six to eight per cent of revenue and 28 per cent slab accounts for 13-15 per cent of revenue. The government proposed two slabs of 5 per cent and 18 per cent, with a special 40 per cent rate for luxury and sin goods such as high end automobiles, tobacco, cigarettes etc. The government is considering redistributing most items in the 12 per cent slab to the 5 per cent category to make essentials like ghee, soaps, snacks, and small FMCG sachets cheaper. Approximately 90 per cent of goods currently taxed at 28 per cent are proposed to shift to the 18 per cent slab, enhancing affordability for items such as refrigerators, air conditioners, and packaged foods. Hatchback cars are also expected to come under the 18 per cent slab. Prime Minister Modi had said the next generation GST reforms will be a Diwali gift, reducing the tax burden on common people and promoting economic resilience.

Tanvee Gupta Jain, Chief India Economist at UBS Securities, estimated a revenue loss of Rs 1.1 lakh crore annually after GST rationalisation. “We believe GST cuts can have a larger multiplier impact than income or corporate tax cuts as it directly affects consumption at the point of purchase, potentially leading to higher consumer spending,” Jain said.

The economists suggested that the fiscal cost to the Centre in the current financial year will be low at 0.07 per cent of GDP because at the earliest it can be implemented is by October. Jain said the revenue loss of Rs 430 billion (0.12 per cent of GDP) for current financial year would get offset from the surplus cess collections and higher than budgeted Reserve Bank of India dividend transfer (Rs 2.7 lakh crore versus Rs 2.1 lakh crore budgeted).

Bringing the state governments on the table would be a task for the government considering the recent statement by the Congress, which asked the government to extend GST compensation cess, which expires on March 31, 2026, to offset any revenue uncertainty from the rationalisation of the rate structure. According to experts, in the new structure, there will be no compensation cess. The Group of Ministers (GoM) on rate rationalisation are scheduled to meet on August 20 and 21. The GoM has ministers from six states namely Kerala, Uttar Pradesh, Rajasthan, West Bengal, Bihar and Karnataka.

Dipti Nayak, director, Indirect Tax, Bhuta Shah& co LLP, said the preliminary estimates suggest short-term revenue losses of Rs 50,000 crore to Rs 1 lakh crore annually with states likely to bear a larger share due to revenue-sharing arrangements.

“Over time, simplification is expected to improve compliance, reduce litigation, and expand the tax base, offsetting part of the near-term fiscal impact. From a macro-economic perspective, rationalisation of GST slabs may reduce distortions, improve efficiency and may provide a modest boost to GDP growth,” Nayak said.

The economists also estimated an increase in GDP growth and lower inflationary pressures due to GST rate cut. According to Jain, the GST rate cut would also lower inflationary pressures and likely increase the probability of further monetary easing by the RBI.

The proposed GST tax cut rate is estimated to increase nominal GDP growth by 0.6 percentage points (over 12 months). “Looking at private consumption pattern around 24 per cent of GDP is accounted by non-durable goods consumption (food, beverages etc), 5.9 per cent of GDP is durable to semi durable goods consumption and 30 per cent of GDP is services consumption,” the IDFC First Bank Economics Research said.