Forget consumption hit, GST 2.0 to unlock ₹5.5 lakh crore spending boost

Fears in the debt market that Goods and Services Tax 2.0 (GST 2.0) will lead to the missing of fiscal deficit target are exaggerated because the government's proposed tax reform will not hurt consumption but will unleash more buying power, leading to higher tax revenue, lower inflation and higher growth, according to a latest report by SBI Research. The expected revenue loss to the government due to lowering the higher GST slab to 18% could be offset by an estimated consumption boost of ₹5.5 lakh crore, with an effective weighted average rate applied at 9.5%.

Prime Minister Narendra Modi, in his Independence Day speech, hinted at an overall reform in GST (GST 2.0). Experts have estimated that with the scrapping of the 28% rate and shifting of items to 12% as well as to the 40% bucket, an overall revenue loss could be ₹60,000 crore-₹1.1 lakh crore per annum, and the average revenue estimated could be at ₹85,000 crore.

For FY26, SBI Research estimates the overall loss could be ₹45,000 crore, which it believes could be contained with a concomitant shift in sin goods from 28 to 40%.

With the proposed rate cuts, the effective weighted average GST rate may come down to 9.5% from 14.4% when GST was first implemented in 2017, because, through the rate rationalisation, the effective weighted average GST rate has been brought down, the report highlights.

Here's the analysis of the estimated net impact on fiscal deficit, inflation and consumption.

Impact on fiscal deficit: In the eventuality of no adjustment in revenue loss, ₹45,000 crore is likely to be more than compensated by the potential gain in revenue post the GST cut. "An estimated consumption boost of ₹5.5 lakh crore with an effective tax rate applied at 9.5%, the additional GST revenue to the government exchequer comes to around ₹52,000 crore, that could be equally divided between Centre and states at ₹26,000 crore," says the report. On an average, the Centre has exceeded the projected tax revenue by ₹2.26 lakh crore in the last four years.

Impact on CPI inflation: Overall, CPI inflation could moderate in the range of 20 to 25 bps, assuming a very modest passthrough.

Net impact on consumption: The GST 2.0 regime, involving an average revenue loss of ₹85,000 crore, could boost consumption by ₹1.98 lakh crore. When taken together with the tax cut, the combined impact of both measures amounts to an additional ₹5.31 lakh crore of consumption expenditure in the economy. This translates into approximately 1.6% of GDP.

On 1 July 2025, the GST completed eight years since its rollout. Introduced in 2017 as a major step towards economic integration, GST replaced a maze of indirect taxes with a single, unified system. It made tax compliance easier, reduced costs for businesses and allowed goods to move freely across states. By improving transparency and efficiency, GST helped lay the foundation for a stronger, more integrated economy.

The current GST structure (GST 1.0) consists of four main rate slabs: 5%, 12%, 18% and 28%. These rates apply to most goods and services across the country. In addition to the main slabs, there are three special rates: 3% on gold, silver, diamond and jewellery, 1.5% on cut and polished diamonds and 0.25% on rough diamonds. A GST compensation cess is also levied on select goods such as tobacco products, aerated drinks and motor vehicles at varying rates. This cess is used to compensate states for any revenue loss resulting from the transition to the GST system.