GST 2.0 Could Trigger Rs5.3 Lakh Crore Consumption Boost, Minimal Fiscal Impact: SBI Research
Moneylife Digital Team 20 August 2025
The Indian government’s proposed goods and services tax (GST) 2.0 rationalisation could become a major demand-side stimulus, boosting consumption, moderating inflation and sustaining growth, with little impact on the fiscal deficit, says a research note from State Bank of India (SBI).
 
The report, released after prime minister (Pm) Narendra Modi’s Independence Day announcement on GST reforms, assesses two rationalisation scenarios and concludes that while the reform may cause an average revenue loss of Rs85,000 crore annually (0.24% of gross domestic product- GDP), this would be more than offset by stronger consumption demand and cess adjustments.
 
SBI's Key Projections
  • Revenue loss: Between Rs60,000 crore and Rs1.1 lakh crore annually, with FY25-26 impact estimated at around Rs45,000 crore.
  • Consumption boost: Rs1.98 lakh crore from GST rationalisation alone; combined with recent income-tax (I-T) cuts, total demand stimulus estimated at Rs5.31 lakh crore (1.6% of GDP).
  • Inflation: Headline consumer price index (CPI) expected to fall by 20bps–25bps (basis points), driven by lower tax on essentials such as food and textiles.
  • Effective GST Rate: Weighted average rate likely to fall from 11.6% (2019) to 9.5% post-rationalisation.
  • Fiscal deficit: Impact negligible; additional tax buoyancy from higher consumption may even generate Rs52,000 crore in new revenues.
 
Shifting the Tax Structure
 
GST 2.0 proposes to scrap the current 28% slab, redistributing items into an 18% bracket and a new 40% 'sin goods' category covering luxury and harmful products like tobacco and aerated drinks. Under scenario-1, SBI says a 30:70 distribution between the 40% and 18% slabs is assumed, while scenario-2 assumes a 50:50 split.
 
As a result, it says items in the 12% slab will largely move into the 5% bracket, increasing the share of goods taxed at lower rates. This restructuring is projected to raise disposable incomes, fuel consumption and indirectly increase tax revenues despite the initial loss.
 
Cushion from Compensation Cess
SBI highlights that the GST compensation fund is expected to show a surplus of Rs45,000 crore by March 2026, after loan repayments. This surplus, alongside higher cess collections from the proposed 40% slab, can be used to plug near-term revenue gaps for both the Centre and states.
 
Impact on Inflation and Growth
The reduction of tax rates on essential goods from 12% to 5% is expected to cut food inflation by 10–15bps (basis points), while services and household items could see modest declines of 5bps–10bps. Overall, CPI inflation may fall by 20bps to 25bps, offering relief to consumers, the report says.
 
On the growth side, SBI estimates that GST 2.0 and direct tax cuts together could inject Rs5.31 lakh crore of additional consumption into the economy, translating into a 1.6% boost to GDP.
 
Fiscal Deficit Concerns 'Overblown'
The report downplays concerns of fiscal slippage. It says, "Even if no adjustments were made, the revenue loss of Rs45,000 crore in FY25-26 could be balanced by consumption-driven tax gains. Historically, the Union government has exceeded tax revenue projections by an average of Rs2.26 trillion annually over the last four years, suggesting resilience."
 
Broader Implications
The SBI report underscores that tax reforms need not conflict with growth or consumption. It says, by rationalising rates, widening the tax base, and ensuring compliance, GST 2.0 could create a more efficient tax regime that supports both households and the exchequer.
 
“In the long run, there is no apparent trade-off between tax reforms and consumption, just as there is none between growth and inflation,” the report notes, adding that debt market fears of fiscal strain are 'myopically overblown'.
Comments
gopalakrishnan.tv
3 months ago
GST 2.0 is the most welcome and a very positive approach . Kudos to the authorities for this reform in particular to boost the consumption and demand for products and services. Happy to see that GST 2.0
with the much needed rationalisation has been announced as an unexpected Gift on independence day to the people paving the way for realisation of the dream envisioned for the Economy as the most advanced by the year 2047. The rationalisation of GST coupled with the Income tax reliefs proposed for the FY 2025-26 can do wonders to the economy for enhanced compliance to tax provisions and removal of tax related issues and improved performance of the economy .
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