GST rate rejig may cool inflation by up to 75 bps in FY2025-26: SBI Research

The rationalisation of GST rates could help lower retail inflation by as much as 75 basis points in FY26, driven by cheaper essential goods and services, SBI Research said in a report.

At its 56th meeting, the GST Council decided to overhaul the current four-tier rate structure into a simpler framework with two slabs of 18% and 5%, alongside a special demerit rate of 40% for select goods.

The new structure will come into force from September 22, 2025.

Of the 453 goods for which rates have been revised, 413 items witnessed a reduction, while only 40 saw an increase. Nearly 295 goods, mostly essentials, have been moved to the 5% or nil tax bracket from the earlier 12%.

SBI Research estimated that the decline in GST on essential goods alone could reduce CPI inflation in this category by 25-30 bps in FY26, assuming a 60% pass-through on food.

Rationalisation of GST on services is likely to cut CPI inflation by another 40-45 bps, bringing the total moderation in the range of 65-75 bps over FY26-27.

“The rationalisation of rates by the GST Council has brought down the effective weighted average GST rate from 14.4% at the time of inception to 11.6% in Sep’19; enhanced buoyancy has been achieved by widening the tax base and removing distortions. Given the current rationalisation of rates, we believe that effective weighted average GST rate may come down to 9.5%,” the report noted.

While the government had pegged the revenue impact of the rejig at ₹48,000 crore annually, SBI Research projected the actual loss at just ₹3,700 crore, equivalent to about 1 basis point of the fiscal deficit, given the expected boost in consumption.

The report also highlighted that GST exemption on life and health insurance premiums would improve affordability, encouraging both greater coverage among existing policyholders and new customer additions.

Calling the move “a citizen-centric evolution of the landmark tax framework,” SBI Research said GST 2.0 should be seen not as a short-lived stimulus but as a structural measure that simplifies compliance, reduces distortions, and ensures long-term revenue buoyancy.