Impact of GST 2.0: SBI Report Estimates Centre’s Revenue Loss at Rs 3,700 Crore for FY26

The central government is set to experience a significantly lower revenue loss from recent Goods and Services Tax (GST) rate cuts than initially anticipated. A report from the State Bank of India (SBI) indicates that the projected revenue loss for the fiscal year 2026 is approximately Rs 3,700 crore, a figure that is considerably less than earlier estimates. This positive outlook is attributed to stronger consumption patterns and improved tax compliance, which have helped mitigate the financial impact of the GST rationalization.

Projected Revenue Losses

According to the SBI report, the government had previously estimated a gross revenue loss of Rs 93,000 crore due to GST rationalization based on fiscal year 2024 projections. However, with enhanced tax collections, the net loss was revised down to Rs 48,000 crore. For FY26, while the gross loss is expected to rise to Rs 1.11 lakh crore, the net loss is anticipated to be much lower at Rs 25,794 crore, which includes both the Centre’s and states’ shares. Specifically, the Centre’s share of the loss is projected to decrease from Rs 6,960 crore in FY24 to Rs 3,740 crore in FY26. The report emphasizes that this revenue loss represents only a minor impact on the overall fiscal deficit.

Impact on Inflation and Consumption

The SBI report also highlights the potential effects of GST rate reductions on inflation. By lowering GST rates on approximately 295 essential items, many of which now fall under a 5% or zero tax bracket, the Consumer Price Index (CPI) inflation for these items could decrease by 25 to 30 basis points in FY26. Additionally, adjustments in service taxes are expected to further reduce CPI by 40 to 45 basis points, leading to an overall moderation of 65 to 75 basis points over the fiscal years 2026 to 2027. This reduction in inflation is anticipated to stimulate consumer spending, particularly in essential goods and services.

Broader Economic Implications

Experts suggest that the recent GST reforms, part of the GST 2.0 initiative approved by the GST Council, signify a shift towards demand-led economic growth. Under the new structure, essential goods will be taxed at 5%, while other items will attract an 18% tax, and luxury or sin goods will face a 40% tax rate. Analysts from HSBC Global Research predict that these changes, combined with income tax cuts and manageable inflation, could foster sustained economic growth, potentially increasing GDP by up to 0.2 percentage points. Other financial institutions, such as Jefferies and Kotak Institutional Equities, also note that these GST cuts could benefit consumers and businesses, particularly in sectors like fast-moving consumer goods (FMCG), retail, and automobiles.

Future Outlook

The SBI report underscores that past GST rate cuts have often resulted in additional revenues nearing Rs 1 trillion. It argues that the latest reforms should be viewed as structural changes rather than temporary measures, as they are expected to simplify compliance, expand the tax base, and encourage voluntary compliance among taxpayers. Overall, analysts are optimistic that these reforms will invigorate consumption across various sectors, including consumer goods, retail, automobiles, cement, insurance, and renewable energy, while also promoting private capital expenditure after a prolonged period of stagnation.

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