GST reforms to take away some of the tariff sting; GDP growth seen at 6.5% for FY2026. The rationalisation of Goods and Services Tax (GST) is a well-timed and welcome move, which is expected to reinvigorate domestic consumption in the run up to the festive season amidst the risks posed by the steep US tariffs on India’s exports. Under the new GST structure, the 12% tax slab has been merged with 5% and 28% has been subsumed into 18%, along with several other changes. This is likely to reduce the weighted average GST rate to single digits from 11.64% in 2023-24, bringing cheer to consumers and producers alike, while creating fiscal implications for the Central and State Governments. Based on the available information, the first-round revenue foregone to the Centre and states governments is likely to be moderate at Rs. 142 billion and Rs. 338 billion, respectively, in H2 FY2026, as per ICRA’s understanding. The revenue foregone may necessitate other revenue mobilisation or expenditure saving measures, although the second-round impact of enhanced consumption would provide some cushion. Encouragingly, the GST rejig could dampen the headline CPI prints by 25-35 bps during Q3 FY2026-Q2 FY2027, suggesting that the full year average for FY2026 may slip below 3.0%. Given the earlier-than-expected implementation of the rationalisation at the start of the consumption-heavy festive period, the moderate revenue likely to be foregone in H2 FY2026, and the stronger-than-expected Q1 FY2026 GDP print, ICRA now assesses the FY2026 GDP growth at 6.5% (from +6.0% earlier), although this continues to be dampened by the prevailing uncertainty related to the US tariffs.
Under the new GST structure, which will be implemented from September 22, 2025, the 12% tax slab has been merged with 5% and 28% has been subsumed into 18%. Additionally, some items are moving to the nil as well as 40% categories, with the latter in place of the levy of cess atop the 28% GST rate. Accordingly, the rationalisation effectively moves the median tax rate from 12% to 5% for these 391 items. This is sure to be cheered by consumers and producers alike. With these changes, the weighted average GST rate is likely to reduce further to single digits after the GST rejig from 11.64% in 2023-24 (as per GoI estimates), and 14.4% in 2017 (as per RBI’s study).
The Revenue Secretary of the Government of India placed the revenue implication of the rationalisation at Rs. 480 billion (computation based on the GST data for 2023-24). With the CGST loss at Rs. 240 billion, the net loss to the Centre after the CTD (at ~41%) would amount to ~Rs. 142 billion in H2 FY2026, which does not seem substantial, and may be absorbed by the higher than budget dividend shared previously by the Central Bank. For the states, ICRA assesses the first-round revenue to be foregone in terms of SGST and devolution, at around Rs. 338 billion in H2 FY2026. Overall, the total annualised ‘loss’ of ~Rs. 0.96 trillion (Centre + states) would be similar to the revenue assessed by the GoI to be foregone from the personal income tax changes announced in this year’s budget.
The GST Council has recommended to end the compensation cess on the sin and luxury goods and instead levy a ‘special rate’ of 40% on these items, with effect from September 22, 2025. The cess rate is being merged with GST to maintain the tax incidence on most goods, including motor vehicles (SUVs), aircrafts, yachts for personal use, aerated waters/lemonade, coal and briquettes relatively unchanged. Notably, the Council has decided to continue with the cess on pan masala, tobacco and cigarettes until the loan and interest payment obligations under the compensation cess account are completely discharged.
The rationalisation of GST tax slabs is likely to augur favourably for the CPI inflation, amid the positive impact of the shift in most F&B and miscellaneous items from the 12% to 5% tax slab. The GST rationalisation could dampen the headline CPI inflation prints by 25-35 bps from Q3 FY2026 through Q2 FY2027, taking the average for FY2026 sub-3%.
While the GST rate rationalisation creates fiscal implications for the Centre and the State governments, the household sector is expected to benefit through expenditure savings, which in turn augurs well for boosting consumption. Private final consumption expenditure contributes ~57% to India’s GDP growth per annum on an average. The revenue foregone for the Centre and states would accrue to households, which ICRA assessed at ~Rs. 1.0 trillion on annualised basis. Assuming that ~60-70% of this amount is spent, the PFCE is expected to increase by at least Rs. 0.6-0.7 trillion per annum in terms of the direct impact.
Further, the domestic consumption and sentiment boost will help to offset the worries triggered by the tariffs and penalties imposed by the US on Indian exports. Nevertheless, job losses in some sectors would still constrain the demand of the associated households. Private sector capex decisions may get a boost for domestic consumption-oriented sectors. However, exporters may still feel jittery about embarking on fresh capex. Given the earlier than expected implementation of the GST rationalisation, ICRA now assesses the FY2026 GDP growth at 6.5% (from +6.0% earlier). Nominal GDP growth is expected to print at ~8.5%, with a mild downside.
