Bank of Baroda Report Highlights GST Reforms: Slab Reductions Aim to Simplify Taxes, Reduce Prices, and Enhance Consumption
Indian consumers are poised to experience a significant reduction in the Goods and Services Tax (GST) structure, as the government proposes to simplify the current four-tier system into a more manageable two-tier framework. This change aims to lower tax rates on essential goods, making them more affordable and stimulating consumer spending. The anticipated reforms are expected to provide relief to various sectors, particularly fast-moving consumer goods and durable goods, while also addressing inflationary pressures.
Proposed Changes to GST Structure
The Indian government is considering a major overhaul of the GST system, which currently operates with four tax slabs: 5%, 12%, 18%, and 28%. Essential food items are taxed at either nil or 5%, while luxury goods, including automobiles, fall under the highest slab of 28%, which includes additional cesses. The proposed changes would reduce the 12% slab to 5% and the 28% slab to 18%. This adjustment is expected to alleviate the tax burden on fast-moving consumer goods (FMCGs) and durable goods, according to an analysis by the Bank of Baroda. The report indicates that approximately 11.4% of Private Final Consumption Expenditure (PFCE) will directly benefit from these changes.
The estimated taxable consumption in India is between Rs 150 lakh crore and Rs 160 lakh crore. The GST reforms are projected to increase spending by Rs 0.7–1 lakh crore, contributing to a 0.2–0.3% increase in GDP during the latter half of FY26. The effective tax rate for taxable GST goods and services is expected to decrease to 14-15%. These changes aim to simplify the tax structure and enhance consumer purchasing power.
Impact on Food and Non-Food Items
Food items are set to be the primary beneficiaries of the proposed GST changes. Products such as milk, cheese, oils, fats, sugar, confectionery, and processed foods will see their tax rates drop from 12% to 5%. This reduction is anticipated to make these essential goods more affordable for consumers, potentially increasing demand in the food sector.
On the non-food side, durable goods, including air conditioners, LED/LCD televisions, dishwashers, and motor vehicles, will experience a tax rate reduction from 28% to 18%. This shift is expected to revitalize demand in the consumer durables market, which has seen sluggish growth, with only a 2.6% increase in Q1 FY26 compared to a 10.7% rise during the same period last year. The reduction in GST rates is likely to encourage consumers to make purchases in these categories, further stimulating economic activity.
Broader Economic Implications
The GST overhaul is anticipated to lower input costs in sectors such as construction and manufacturing. This could lead to reduced prices for goods like cement, tires, and auto parts, thereby exerting downward pressure on both Consumer Price Index (CPI) and Wholesale Price Index (WPI) inflation. The report notes that approximately 8.5% of the CPI basket will be affected by these changes, which could help stabilize prices in the economy.
Additionally, the timing of these reforms coincides with a recent 100-basis-point cut in the repo rate by the Reserve Bank of India (RBI). This monetary policy adjustment is expected to further stimulate demand for auto loans, credit cards, and personal loans. Non-banking finance companies (NBFCs) are also likely to benefit from increased consumer spending, particularly during the festive season when demand typically rises.
Upcoming GST Council Meeting
The GST Council, led by Union Finance Minister Nirmala Sitharaman, is scheduled to convene on September 3 and 4 to discuss the proposed changes. The council will consider moving to a simplified tax structure with two primary slabs of 5% and 18% for most goods and services, while maintaining a higher rate of 40% for select luxury and sin items. This meeting will be crucial in determining the final structure of the GST reforms and their implementation timeline, as the government seeks to bolster consumption amid global economic challenges.
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