GST Reform 2.0 trims tax slabs, with essentials at 5% and most goods at 18%, aiming to boost consumption, ease compliance, and spur demand. Combined with income tax cuts, experts see a path for sustained growth and private sector revival.
India is set to enter a new phase of economic momentum with the announcement of GST Reform 2.0, aimed at simplifying the tax structure and boosting consumption. Experts say the reforms, coupled with recent income tax cuts, signal a decisive push for demand-led growth, potentially paving the way for sustained economic expansion.
The Goods and Services Tax (GST) Council on September 3 approved a major overhaul of the indirect tax regime. Under the new system, essentials will be taxed at 5 per cent, most other goods at 18 per cent, while a new 40 per cent tax will apply to luxury and sin items. The reforms will come into effect from September 22.
The objective is clear: simplify compliance, increase disposable income, and spur overall demand.
Who Stands to Gain?
The reform is expected to benefit a wide range of sectors, from consumer staples like food and personal care products to retail (apparel and footwear), automobiles, insurance, renewables, and agrochemicals.
Jefferies highlighted the timing of the GST changes:
“The GST rate rationalisation comes at a time when the industry has been facing weak demand across categories and hence, will benefit both the consumers (lower product prices) and the companies (higher volumes).”
Similarly, Kotak Institutional Equities noted:
“The sharp, broad-based reduction in the GST rates of most food and key personal care categories could revive consumption partially.”
The reforms are also expected to positively impact FMCG consumption, aided by easing commodity prices, a good monsoon, and recent personal income tax cuts.
Kotak added, “Easing commodity prices (tea, palm, coffee), good monsoon, favourable base for urban consumption, the recent personal income tax reduction and the upcoming pay commission augur well for FMCG consumption in the next 12-15 months.”
Growth, Inflation, and Monetary Policy
HSBC Global Investment Research said the reforms, combined with “benign inflation, income tax cuts in February, and accommodative monetary policy, create an environment for sustained growth.”
The revival in demand is also expected to provide a boost to private sector investment, which has been sluggish in recent years. HSBC forecasts a 0.2 percentage point rise in GDP growth over a year, led by stronger consumption. Standard Chartered Global Research added that GST cuts could boost GDP by 0.1–0.16 percentage points while lowering inflation by 40–60 basis points annually.
Jefferies further pointed out, “The GST cuts should help inflation by 25 bps, increasing the probability of a 25 bps rate cut in the upcoming meeting. An outside chance of 50 bps cut also remains.”
Fiscal Impact and Revenue Calculations
The GST overhaul will come with a fiscal cost. HSBC estimates a gross revenue loss of Rs 93,000 crore, with revenue recycling from the compensation cess to the new 40 per cent bracket offsetting Rs 45,000 crore, leaving a net loss of Rs 48,000 crore, or 0.16 per cent of GDP.
Scaling this to the FY26 base, HSBC said, “A net revenue loss of Rs 57,000 crore (0.16 per cent of GDP) over a year. Since only half the fiscal year is left, the implication for FY26 would be around 0.1 per cent of GDP.”
Standard Chartered projected pressure on the FY26 combined fiscal deficit due to shortfalls in direct taxes and potential relief packages for exporters but maintained that the base case for the combined fiscal deficit is 6.9 per cent of GDP, with 4.4 per cent for the Centre.
Sector-Specific Changes
Some of the notable changes include:
- Tobacco: Continues at 28 per cent GST plus cess until loans are repaid, after which the 40 per cent rate will apply.
- Aerated Beverages: Current 28 per cent GST plus 12 per cent cess revised to 40 per cent GST.
- Essentials: Packaged water, fruit juices, dairy products, and other essentials will now be taxed at 5 per cent.
- Consumer Goods: Items like toothpaste, shampoo, soaps, chocolates, and Ayurveda products will also see a drop from 18 per cent to 5 per cent.
E-commerce services will see changes too.
Morgan Stanley highlighted, “Local e-commerce delivery services will now attract a GST rate of 18 per cent. For Zomato, the food delivery services had customer delivery fee of Rs 11–12 in our calculations, which would imply a potential impact of Rs 2 per order. For Swiggy, we estimate the delivery fee to be approx Rs 14.5 per order and hence the potential impact to be Rs 2.6.”
The Road Ahead
The reform has been welcomed by market watchers and economists as a carefully calibrated step towards stimulating demand and consumption. By lowering tax burdens on essentials while maintaining higher rates on luxury items, the government aims to strike a balance between growth stimulation and fiscal prudence.
In the words of Jefferies, “There’s no specific need to have an anti-profiteering clause for these GST cuts announced and these will get passed on to consumers.”
With these reforms, India is positioning itself for a demand-led growth cycle, one that could lift both consumers and businesses, while keeping inflation and fiscal impact in check. For a country eager to revive consumption and private investment, GST 2.0 could be the spark needed.