The Centre’s proposal to streamline the Goods and Services Tax (GST) structure into two main slabs—5% and 18%—is expected to simplify the regime and boost consumption, but will put fiscal strain on both central and state governments, with states likely to bear the larger brunt, according to analyses by brokerages.
As per the plan, the 12% and 28% slabs will be removed, with almost all items in the 12% bracket shifted to 5% and most items in the 28% bracket moved to 18%. A 40% rate would remain for luxury and sin goods, while diamonds and gold jewellery would continue to attract 0.25% and 3% respectively. The proposal will be taken up by the GST Council in its upcoming meeting scheduled for September or October.
Fiscal impact
Emkay Global estimates annualised revenue losses of about 0.4% of GDP (₹1.2 trillion-plus) from the GST changes, with states facing disproportionate losses of ~0.3% of GDP versus ~0.15% for the Centre. IDFC First Bank pegs the overall fiscal cost higher, at 0.5% of GDP (₹1.8 trillion) over 12 months, again with states taking the bigger hit as they rely heavily on SGST and also receive 41% of CGST collections.
For FY26, the immediate fiscal impact is expected to be lower since implementation may only begin in October. The Centre’s FY26 net fiscal slippage could be contained at 0.07–0.2% of GDP, with buffers expected from the ₹1.2 trillion residual compensation cess collections by FY26-end, which could be split between Centre and states.
However, the tax cuts come at a time when gross tax revenues are already under pressure. Net income tax collections have contracted 7.5% year-on-year in FYTD26 (April–August 11), while corporate tax collections are growing at just 2.9%, far below budgeted targets.
Growth and inflation effects
On the positive side, GST rationalisation could support growth and consumption. Using NIPFP multipliers, IDFC First Bank estimates the move could lift nominal GDP growth by 0.6 percentage points over the next 12 months. Consumption-heavy sectors such as FMCG, consumer durables, automobiles and cement are expected to benefit.
Inflationary pressures are also seen easing. Both reports suggest CPI inflation could fall by 50–80 basis points over a year, with the sharpest impact in food and beverages as packaged foods, butter and ghee shift to the lower 5% slab. However, the impending revision of the CPI basket in early 2026, which is expected to reduce the weight of food, could dilute this effect.
Risks ahead
Economists caution that the net impact on aggregate demand will depend on fiscal choices. If the Centre or states reduce capital expenditure or social sector spending to offset revenue losses, the consumption boost from lower taxes may be partly neutralised. Bond yields, Emkay Global warns, could also face upward pressure as fiscal balances come under strain.