Could GST Reforms Moderate CPI Inflation in the Range of 65-75 bps Over FY26-27?
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Synopsis
Discover how the recent GST reforms can significantly impact CPI inflation, potentially lowering it by 65-75 bps over the next two fiscal years. This article explores the benefits of the GST 2.0 system and its implications for the economy and middle-class consumers.
Key Takeaways
- GST reforms could reduce CPI inflation by 65-75 bps over FY26-27.
- Approximately 295 essential items have seen a GST rate reduction.
- Positive fiscal impact with minimal revenue loss anticipated.
- GST rate changes could significantly benefit the banking sector.
- The reforms aim to simplify the tax system, enhancing compliance.
New Delhi, Sep 5 (NationPress) A report by SBI indicates that GST reforms could help in moderating CPI inflation within a range of 65-75 bps over the fiscal years FY26-27. The introduction of the simplified GST 2.0 system is expected to unlock numerous benefits, primarily boosting consumption among the middle class, while also contributing to lower inflation, enhanced business operations, and an improved quality of life.
As the GST rate on essential items, which encompasses approximately 295 goods, has been reduced from 12 percent to 5 percent/nil, it is anticipated that CPI inflation in this category may decrease by 25-30 bps in FY26, factoring in a 60 percent pass-through effect on food items.
Additionally, the rationalization of GST rates on services is projected to result in a further 40-45 bps reduction in CPI inflation for other goods and services, considering a 50 percent pass-through effect, as mentioned in the report.
“Overall, we expect CPI inflation to be moderated within the range of 65-75 bps over FY26-27,” the SBI report stated.
Out of 453 goods whose GST rates have been adjusted, 413 goods saw a decrease in rates, while 40 goods recorded an increase.
The government anticipates a net fiscal impact from this rationalization to be around Rs 48,000 crore on an annualized basis. However, considering growth trends and consumption boosts, “the expected revenue loss in GST is minimal at Rs 3,700 crore, which won’t affect the fiscal deficit,” the report elaborated.
Historically, rate cuts have often resulted in additional revenues summing to nearly Rs 1 lakh crore.
It is crucial to interpret the rationalization not just as a temporary stimulus for demand but as a fundamental measure that simplifies the tax framework, lowers compliance burdens, and fosters voluntary compliance, thereby expanding the tax base.
“In this broader context, the Prime Minister’s vision for a streamlined GST framework is seen as a significant step towards long-term revenue growth and enhanced economic efficiency,” the report highlighted.
The rationalization of GST rates is expected to positively impact the banking sector, influencing its operational metrics significantly.
Particularly for the banking sector, the reform is expected to result in substantial cost efficiencies since most relevant rates have been decreased, as per the report.
The GST on individual health and life insurance premiums, including reinsurance, has been lowered to zero. This removal is set to reduce overall premiums and enhance affordability.
As a result, existing households may consider increasing their health insurance coverage, while new buyers might be attracted to purchase health and term insurance.
Point of View
I believe the GST reforms represent a pivotal moment in India's economic landscape. They not only promise to reduce CPI inflation but also aim to simplify tax compliance, fostering a more robust and equitable economy. It's essential for all stakeholders to understand and adapt to these changes for long-term benefits.
NationPress
05/09/2025
Frequently Asked Questions
What are the expected impacts of GST reforms on CPI inflation?
GST reforms are projected to moderate CPI inflation by 65-75 bps over FY26-27, primarily through rate reductions on essential goods and services.
How does the simplified GST 2.0 system benefit consumers?
The GST 2.0 system is designed to boost consumption, particularly among the middle class, while also contributing to lower inflation and enhanced ease of doing business.
What is the fiscal impact of the GST rate rationalization?
The government estimates a net fiscal impact of Rs 48,000 crore annually, with minimal expected revenue loss of Rs 3,700 crore, which will not affect the fiscal deficit.
How many goods have seen changes in GST rates?
Out of 453 goods that underwent GST rate changes, 413 experienced decreases in rates, while 40 saw increases.
What implications do GST reforms have for the banking sector?
The reforms are expected to bring about meaningful cost efficiencies within the banking sector, as many relevant rates have been reduced.
