GST rate rejig may ease inflation by up to 75 bps in FY26: SBI Research

The GST rate rejig, which will bring down tax rates on essential household items and services, may help moderate retail inflation by 65-75 basis points in the next fiscal, SBI Research Report said on Thursday.

The 56th meeting of the GST Council on Wednesday rationalised the current 4-tiered tax rate structure into a citizen-friendly 'Simple Tax' - a two-rate structure with a standard and merit rate of 18 per cent and 5 per cent, respectively. A special de-merit rate of 40 per cent has been set for a select few goods and services.

The new tax rates will be effective from September 22, except for tobacco and related products, for which a date will be announced later.

Of the 453 goods where GST rate has changed, 413 goods saw a decrease in rates, while only 40 goods witnessed an increase in rates. Almost 295 goods now have new GST rate of 5 per cent/NIL from earlier 12 per cent, the report said.

"Since the GST rate of essential items (around 295 items) has declined from 12 per cent to 5 per cent/NIL, the CPI inflation in this category may also come down by 25-30 bps in FY26 after considering a 60 per cent pass-through effect on food items.

"Apart from this, the rationalisation of GST rates of services also leads to another 40-45 bps reduction in CPI inflation on other goods and service items, considering a 50 per cent pass-through effect. Overall, we believe CPI inflation may be moderated in the range of 65-75 bps over FY26-27," SBI Research Report said.

The rationalisation of rates by the GST Council has brought down the effective weighted average GST rate from 14.4 per cent at the time of inception to 11.6 per cent in September 2019. Enhanced buoyancy has been achieved by widening the tax base and removing distortions. Given the current rationalisation of rates, we believe that the effective weighted average GST rate may come down to 9.5 per cent, it added.