The Goods and Services Tax (GST) has been a cornerstone of India’s tax reform, unifying numerous taxes into a single framework to streamline the country’s indirect tax system. However, despite its successes, UBS Securities India suggests that the recent GST rate rationalisation, while beneficial, is just a short-term stimulant. The report points to much broader and more sustainable economic gains yet to come from next-generation GST reforms currently underway.
GST Rate Rationalisation: Immediate Consumer and MSME Relief
Ahead of Diwali 2025, India’s GST Council approved a simplified two-tier GST slab structure comprising 5% and 18% rates, replacing the earlier multilayered slabs of 5%, 12%, 18%, and 28%.
This rationalisation aims to lower tax rates on multiple essential goods and services, easing the tax burden on consumers and MSMEs alike.
By reducing GST rates on items like air-conditioners, automobiles (including two-wheelers and small cars), and cement, the reform seeks to increase consumption and reduce inflationary pressures.
UBS notes that GST cuts generally have a higher fiscal multiplier (about -1.08) compared to personal income tax (-1.01) and corporate tax (-1.02), indicating greater stimulus effect on demand.
The report projects a manageable revenue loss of approximately Rs 1.1 trillion annually (0.3% of GDP), which can be offset by surplus cess collection and anticipated dividend transfers from RBI.
Macroeconomic Impact and Fiscal Sustainability
The fiscal implication of the GST cuts, estimated as a shortfall of Rs 43,000 crore (0.12% of GDP) in FY26, appears fiscally viable given compensatory revenue sources.
UBS believes that the tax rationalisation will be 'fiscally neutral,' balancing consumer stimulus with government revenue integrity.
Reduced GST rates are expected to have a deflationary effect, lowering headline inflation and creating monetary policy space.
The report forecasts further repo rate cuts ranging between 25 to 50 basis points during FY26, stimulated by softened inflation and improved credit availability.
Structural Reforms and Next-Gen GST: The Real Long-Term Growth Engine
UBS emphasizes that next-gen GST reforms extend beyond rate cuts to encompass structural enhancements aimed at simplifying compliance, strengthening state finances, and fostering growth.
Measures include digitising GST filing, faster refunds, abolishing inverted duty structures, and rationalising exemptions for better tax policy consistency.
The regime is expected to encourage “Make in India” initiatives by aligning input and output tax rates, reducing cascading taxes, and supporting domestic value addition.
Enhanced GST frameworks will empower MSMEs with improved cash flows and reduced compliance burdens, facilitating their expansion and competitiveness.
Consumer Demand Revival amid Policy Synergies
UBS notes that the combination of GST rationalisation, personal income tax relief, and softening monetary policy forms a potent mix to revive domestic consumption.
Rural demand, recovering after a muted FY24, along with more resilient urban consumer spending, is expected to gain momentum.
The reforms address tariff uncertainties and inflation headwinds, unlocking pent-up demand especially in staples, durables, and automobiles.
Outlook and Policy Recommendations
UBS sees the GST reforms as timely counter-cyclical policy measures, critical to supporting domestic growth in an uncertain global environment.
The report advises continuous monitoring of fiscal impacts and stakeholder feedback to ensure reforms meet growth and revenue objectives.
Enhanced intergovernmental coordination, transparency, and technology adoption remain key to evolving GST into a truly growth-oriented tax system.
Closing Thoughts
While the current GST rate rationalisation offers an immediate consumer and MSME boost, UBS cautions that India’s transformative economic growth hinges on more comprehensive, structural GST reforms. These long-term changes promise to streamline taxation, improve ease of doing business, and sustain fiscal health, laying the foundation for a durable growth trajectory that goes well beyond short-term fiscal fixes.
Source: Times of India, Economic Times, PIB India, UBS Securities India Report
