GST overhaul: Rs 1.1 trillion worth revenue might be lost; UBS says fiscal cost manageable

The fiscal cost of the government's proposed Goods and Services Tax (GST) rate rationalisation will remain manageable, with an estimated revenue loss of Rs 1.1 trillion annually or 0.3% of the GDP, a UBS report said.

For the financial year 2026, the firm expected the shortfall of Rs 430 billion, or 0.12% of GDP, that could be compensated by surplus cess collections along with a higher-than-budgeted dividend transfer from the Reserve Bank of India.


The report, as cited by ANI, highlighted that a GST cut would be more powerful in stimulating consumption than personal income tax or corporate tax cuts, since it directly affects spending at the point of purchase.

Citing a study by the National Institute of Public Finance and Policy, it pointed out that “the GST multiplier stands at -1.08, higher than the multipliers for personal income tax (-1.01) and corporate tax (-1.02).”

In his Independence Day speech from the Red Fort, Prime Minister Narendra Modi had announced that “upcoming next-gen GST reforms before Diwali” would benefit consumers, small industries and MSMEs.

Following that, the finance ministry unveiled its plan for a simplified two-tier GST structure, centred on three pillars: structural reforms, rate rationalisation, and ease of living.

Sources have since revealed that the Centre is proposing to scrap the existing 12% and 28% slabs, keeping only 5% and 18% GST rates. Government sources said, 99% of 12% slab are proposed to move in 5% slab and 90% of items in 28% slab are proposed to move in the 18% slab.

A GST Council meeting is expected around September-October to examine the proposal, ANI reported.

Under the plan, items currently taxed at 12% may move down to 5%, while those at 28% would shift to 18%. “Luxury and sin goods (latter includes cigarettes, other tobacco products, carbonated drinks, high-end automobiles, and intoxicants) will be taxed at a higher 'special slab rate' of 40%),” the report stated.

The sectors likely to benefit from the removal of the 12% slab include processed foods, garments, footwear, construction materials, tractors, hotels and two-wheelers.

Another change on the horizon is the end of the compensation cess. The cess, amounting to Rs. 1.7 trillion and initially imposed to make up for state revenue shortfalls, will conclude ahead of the March 2026 deadline as related loans are paid off. UBS said this would create fiscal room for the government to align GST rates within the new system.

The report also suggested that lowering GST rates would have a deflationary effect, helping to cool inflation and opening the way for further monetary policy easing. With price pressures already soft, UBS predicted the repo rate could settle in the 5.0–5.25% range, leaving scope for another 25–50 basis points cut during the rest of FY26.

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