GST 2.0 Could Unleash Consumption Boost, Higher Tax Revenue, lower inflation and higher growth
FinTech BizNews Service
Mumbai, August 19, 2025: The State Bank of India’s Economic Research Department has come out with a Research Report GST 2.0, authored by Dr. Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank of India:
In the long run, there is no apparent trade off between tax reforms and consumption just as we have no trade off between growth and inflation in the long run..The GST 2.0 could unleash a consumption boost and hence higher tax revenue, lower inflation and higher growth..The revenue loss through GST rate adjustment could be more than offset by increased consumption and cess adjustments...Fiscal deficit for FY26 unlikely to be breached...Debt Market fears thus appear somewhat myopically overblown
During the 79th Independence Day Speech, Hon’ble Prime Minister has indicated an overall reform in GST in the form of rates rationalization (GST 2.0)
❑ Overall, we expect a revenue loss of Rs 1.1 lakh crore in Scenario-1 and ~Rs 60,000 crore in Scenario-2 per annum due to GST rationalization. Thus, average revenue loss could come around Rs 85,000 crores
• For FY26, it could be at Rs ~Rs 45,000 crores.. Overall headline revenue loss likely to contained with a concomitant shift in sin goods from 28 to 40%
❑ In the case of India, GST collections have varied across states. Though the rationalisation of rates by the GST Council has brought down the effective weighted average GST rate from 14.4% and given the current rationalization of rates, we believe that effective weighted average GST rate may come down to 9.5%
Net impact on Fiscal deficit could be non-existent / minimal
• The balance in compensation cess is around Rs 45,000 crores. An equivalent revenue foregone Rs 45,000 crores in FY26 is equally divided between states. Since the compensation cess is only for the states, thus Rs 22,500 crores could be adjusted from the compensation cess in the case of a baseline scenario, leaving Rs 22,550 still in the compensation cess kitty. The remaining Rs22,550 crores revenue foregone to centre at Rs 22,550 crores could at best add 5 bps to Centre's fiscal deficit
• In the eventuality of no adjustment in revenue loss, Rs 45,000 crores is likely to be more than compensated by the potential gain in revenue post the GST cut. An estimated consumption boost of Rs 5.5 lakh crores with an effective tax rate applied at 9.5%, the additional GST revenue to the Government exchequer comes to around Rs 52,000 crores, that could be equally divided between Centre and States at Rs 26,000 crores... On an average, the Centre has exceeded the projected tax revenue by Rs 2.26 trillion in the last four years
Net impact on CPI inflation
• Overall, we believe CPI inflation may be moderated in the range of 20 to 25 bps assuming very modest passthrough
Net impact on consumption
• The GST 2.0 regime, while also involving an average revenue loss of Rs 85,000 crore, is estimated to have boosted consumption by Rs1.98 lakh crore. When taken together with the tax cut, the combined impact of both measures amounts to an additional Rs 5.31 lakh crore of consumption expenditure in the economy. This translates into approximately 1.6% of GDP
