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Investing.com -- Indian Prime Minister Narendra Modi signalled a major reset of India’s goods and services tax, proposing to fold the 12% and 28% slabs into 5% and 18%, while creating a new 40% rate for luxury and harmful products.
The overhaul, expected by Diwali, would also phase out the compensation cess introduced in 2017 to protect states from revenue losses.
The current multi-rate system includes four primary slabs of 5%, 12%, 18% and 28% plus various cesses.
GST rationalisation would bring system to three primary rates simplifying a regime long criticised for its complexity.
Bank of America estimates the rationalisation could shave up to ₹1.2 trillion in annual GST revenue, or about 30 bps of GDP, though stronger consumption may offset loss.
Though states would bear the bulk of the shortfall and need to approve the plan through the GST Council, at a time when many are already under fiscal strain.
GST collections have been robust, averaging over ₹2 trillion a month so far in fiscal 2026, compared with ₹1.24 trillion in 2022, as there is higher compliance and formalisation.
Economists expect the lower rates to lift consumption and will give 20–40 bps boost to GDP growth, while easing inflation could give the RBI more room, even though rate cuts remain unlikely for now.
With the Centre targeting a fiscal deficit of 4.4% of GDP this year, down from 4.8% in FY25, economist at BofA warn fiscal risks are likely to surface in FY27 when the full impact of the tax reset kicks in.