GST revamp may trim revenue but fiscal impact limited, says BofA Securities

GST Council approves two-slab system from September 22; BofA Securities says impact on GDP and government finances will be small, while consumption may get a boost

The Goods and Services Tax (GST) Council has approved a major overhaul of India’s indirect tax system by adopting a two-slab structure. The new rates will come into effect from September 22.

 

The GST Council unanimously agreed to simplify the system to two main slabs:  5 per cent: For essential goods and consumer staples

18 per cent: For aspirational goods such as televisions, air conditioners, and small cars 

A special 40 per cent tax rate will apply to “sin goods” like tobacco and ultra-luxury products. Tobacco will continue to attract a compensation cess until loans taken to support state revenues are fully paid off.   

 

Limited GDP impact from GST changes

 

According to BofA Securities, the recent changes to GST will have only a small impact on the economy. Their calculations show that the effective GST rate has been about 11 per cent in recent years, with FY26 YTD (year to date) estimated at 10.9 per cent. Based on the decisions taken in the 56th GST Council meeting, the total revenue loss is expected to be around ₹93,000 crore (about 26 basis points of GDP). However, after adjusting for higher revenues from the 40 per cent tax slab, the net loss drops to roughly ₹48,000 billion, or 13 basis points of GDP (based on FY23-24 levels).

 

Even if the loss ends up being slightly higher — around 18-20 per cent more — strong consumption and lower input tax credit claims could offset some of the shortfall. The loss will be shared between the Centre and states, with states bearing about 70 per cent of it. Overall, the fiscal impact is expected to be small and manageable. 

Compensation cess to end in 2025

 

The GST Council also confirmed that the compensation cess, which was introduced to protect state revenues during GST rollout, will be phased out. Although its share in total GST revenue has been falling, it still contributes over 6 per cent. The cess will continue until all loans and interest taken for GST compensation are repaid, which is likely to happen in 2025, particularly for tobacco products.

 

Positive for RBI, fiscal deficit under control

 

BofA Securities said that lower GST rates could help bring down inflation and boost consumption, giving the Reserve Bank of India (RBI) more flexibility in its monetary policy. However, they expect the RBI to stay data-driven and not rush into cutting rates.

 

On the fiscal side, the GST rate cut is unlikely to derail government finances. BofA maintains its FY26 fiscal deficit projection at 4.4 per cent of GDP.