SBI Research: GST Rate Cuts Could Ease Inflation by 75 bps in FY26

The recent Goods and Services Tax (GST) rate rationalisation could help cool retail inflation by 65–75 basis points in FY2025–26, according to a new report by SBI Research. The moderation is expected to come largely from lower prices of essential goods and services following the tax overhaul.

At its 56th meeting, the GST Council approved a significant restructuring of the tax framework, replacing the current four-tier structure with a simplified system. The revised framework introduces two primary slabs of 18% and 5%, along with a demerit rate of 40% for select goods. The changes will take effect from September 22, 2025.

Impact on Inflation and Consumption

Of the 453 goods reviewed under the new structure, 413 items will see a reduction in GST rates, while only 40 will face an increase. A notable shift involves around 295 goods—largely essentials—being moved to the 5% or nil tax bracket from the earlier 12%.

SBI Research estimated that reduced GST on essential goods could cut consumer price index (CPI) inflation in this category by 25–30 basis points in FY26, assuming a 60% pass-through on food. In addition, rationalisation of services is expected to reduce CPI inflation by a further 40–45 basis points, bringing the total moderation to as much as 75 basis points over FY26–27.

Effective GST Rate to Decline

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The report suggested that the effective weighted average GST rate may fall to 9.5%, compared with 11.6% in September 2019 and 14.4% at the time of the tax’s inception. This would mark a major shift towards greater affordability and efficiency in the system.

SBI Research noted that despite lower tax rates, revenue buoyancy could be maintained through higher consumption, a broader tax base, and reduced distortions.

Minimal Revenue Impact

While the government had earlier estimated the annual revenue loss from the rejig at ₹48,000 crore, SBI Research projected the actual loss at just ₹3,700 crore, equivalent to only about 1 basis point of the fiscal deficit. The report said this modest impact reflects the likelihood of stronger consumption growth offsetting much of the revenue shortfall.

Broader Benefits and Structural Reform

The report also highlighted additional benefits from GST exemptions on life and health insurance premiums, which could improve affordability and expand coverage among households.

SBI Research described the changes as a “citizen-centric evolution” of the landmark GST framework, emphasising that GST 2.0 should not be viewed as a temporary stimulus, but rather as a structural reform aimed at simplifying compliance, reducing distortions, and supporting long-term revenue stability.

Conclusion

With lower inflationary pressures, minimal revenue loss, and improved affordability in essentials and insurance, the GST rationalisation appears well-positioned to strike a balance between economic stimulus and fiscal stability. SBI Research’s findings suggest the move could provide both immediate relief to consumers and long-term efficiency gains for the economy.