GST reset could lend Rs 1.98 trn consumption thrust; rev loss Rs 85,000 cr: SBI Research

Kolkata: GST reform, a good eight years after the Goods and Services Tax was introduced in July 2017, is being viewed as a much-needed thrust to consumption in the economy. In a report the think tank of State Bank of India, SBI Research has pegged the GST reset exercise can provide a consumption thrust of Rs 1.98 trillion. It has also said that the switch to two rates and a lower tax structure could effect an average revenue sacrifice of Rs 85,000 crore a year. But the revenue loss will be more than compensated by a rise in consumption, SBI Research said.

"The GST 2.0 regime, while also involving an average revenue loss of Rs 85,000 crore, is estimated to have boosted consumption by Rs 1.98 lakh crore," SBI Research said. For the current financial year FY26, however, the revenue loss for the government can be limited to Rs 45,000 crore. This calculation assumes that the new GST will come into effect from October.

While a boost in consumption is always accompanied by the apprehension of inflation rising, SBI Research said it doesn't think it will fuel inflation since the step is aimed at a decline in prices. The consumption boost could push the GDP by about 0.6 percentage points. "Overall, we believe CPI (consumer price index) inflation may be moderated in the range of 20 to 25 basis points," mentioned the report.

The report also mentioned two points. One, CPI inflation may also come down by 10-15 basis points after considering a 60 per cent pass through effect on food items since GST rate of essential items such as food, cloth could dip from 12% to 5%. The GST rate rationalisation could also usher in 5 to 10 basis points reduction in CPI inflation on other goods and service items (considering a 25% pass through effect).

SBI Research has also estimated how the effective weighted average GST rate has declined down the years. It was 14.4% when it was implemented in July 2017. It subsequently came down to 11.6% in September 2019. If the proposed GST reform comes through, the "effective weighted average GST rate may come down to 9.5%," said the think tank.

It must be remembered that the GST Council is the empowered body to have the lats word on the GST reforms on the rates proposed by the government and which items will attract what rates of taxes. The Council is expected to meet in September to decide on this measure, which is being viewed as a major structural move to breathe life into the sluggish consumption situation in the country. The Centre's proposal of GST reform will be discussed by a panel of state finance ministers. After they approve it, the proposal will be submitted to the GST Council.

The finance ministry has proposed a 'next-gen GST', whereby the current four rates of GST will be trimmed into two rates -- 5% and 18%. There will be a 40% slab too that will be levied on only a few items such as tobacco and pan masala (sin goods). While delivering his Independence Day speech, Prime Minister Narendra Modi said the GST reforms will become a double Diwali gift for the people of the country since the price of many goods will come down by a significant extent.

"The government has, therefore, incurred revenue losses on both the direct tax side through income tax cuts and indirect tax side through GST 2.0 adjustments. Yet, these forgone revenues could effectively translate into greater household purchasing power, and the combined stimulus from both channels has provided a meaningful and timely support to aggregate demand," said the report.