Will GST Reforms Really Cost the Centre Only 0.05% of GDP?
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Synopsis
Discover how the recent GST reforms may only impact India's GDP by a mere 0.05%. While short-term revenue losses are expected, the long-term benefits could foster greater consumption and compliance.
Key Takeaways
- The government’s GST reforms may only impact GDP by 0.05%.
- Fiscal burden on the Centre is projected at Rs 18,000 crore.
- New rates will come into effect on September 22.
- Short-term revenue losses are expected to be significant.
- Long-term benefits could enhance economic growth.
New Delhi, Sep 4 (NationPress) The recent sweeping alterations in the Goods and Services Tax (GST) rates introduced by the government are projected to have a minimal effect on public finances. A report from the global brokerage firm Bernstein indicates that the fiscal burden on the Centre is anticipated to be merely Rs 18,000 crore, which accounts for just 0.05 percent of India’s estimated GDP for FY26.
On September 3, significant GST reforms were announced, including a reduction in the number of tax slabs and the lowering of rates for a broad array of goods.
From everyday FMCG products to automobiles, electronics, and insurance, various items are expected to see price reductions effective from September 22.
Experts believe these changes will enhance demand, boost tax compliance, and significantly promote consumption-driven growth.
Bernstein’s latest India Strategy Note emphasizes that while the reforms may initially impact revenue, the overall effect on the economy will remain limited.
The brokerage forecasts a revenue loss of Rs 79,600 crore from adjusting the 12 percent slab to 5 percent, along with an additional Rs 1.12 lakh crore from eliminating the 28 percent slab.
These losses will be partially mitigated by gains of Rs 700 crore from the transition from 12 to 18 percent and Rs 15,000 crore from moving select items from 28 to 40 percent.
Considering these adjustments, the total revenue loss for the Centre and states is expected to reach around Rs 1.57 lakh crore.
Of this, the Centre’s share amounts to approximately Rs 74,000 crore. Bernstein further anticipates a 5 percent reduction in capital expenditures, equating to Rs 56,000 crore, to counterbalance the revenue shortfall.
Consequently, the actual fiscal burden for the Centre is reduced to Rs 18,000 crore.
Meanwhile, HSBC's separate report estimates the total revenue loss from the tax reductions to be around Rs 9.3 lakh crore (approximately $10.8 billion) based on FY24 consumption levels.
Redirected revenues from the compensation cess into the new 40 percent GST bracket could cover nearly Rs 4.5 lakh crore (around $5.2 billion) of this loss, resulting in a net shortfall of about Rs 4.8 lakh crore (about $5.6 billion), or 0.16 percent of GDP.
Scaling this to the FY26 base, HSBC predicts a revenue loss of Rs 5.7 lakh crore, still representing only 0.16 percent of GDP over the year.
With only half of the fiscal year remaining, the fiscal impact for FY26 would be roughly 0.1 percent of GDP.
Both reports indicate that while GST reforms will incur some revenue losses for the government, the long-term advantages of increased consumption and enhanced compliance are expected to outweigh the short-term fiscal challenges.
Point of View
I believe that while the GST reforms may present short-term challenges for the government's revenue, the potential for enhanced consumer spending and compliance could ultimately lead to a more robust economy. It’s essential for the government to strike a balance between immediate fiscal impacts and long-term growth strategies.
NationPress
04/09/2025
Frequently Asked Questions
What impact will the GST reforms have on public finances?
The GST reforms are expected to have a minimal fiscal impact, estimated at Rs 18,000 crore, which is only 0.05% of GDP.
When will the new GST rates take effect?
The new GST rates are set to go into effect from September 22.
Will the GST reforms stimulate economic growth?
Yes, analysts predict that the reforms will boost demand, improve tax compliance, and promote consumption-driven growth.
How much revenue loss is projected due to these reforms?
The total revenue loss is projected to be around Rs 1.57 lakh crore for the Centre and states combined.
What are the long-term benefits of the GST reforms?
The long-term benefits include increased consumption and stronger tax compliance, which could outweigh the short-term fiscal hits.
