The Indian government’s decision to simplify the Goods and Services Tax (GST) system by cutting tax rates and restructuring slabs promises significant relief for consumers and a boost to the economy. This major policy announcement aims to replace the existing four-tier GST structure with a simpler two-tier system, resulting in substantial price reductions for a wide range of goods. According to a recent report by Bank of Baroda (BoB), these reforms could reduce inflationary pressures, enhance household savings, and generate increased consumption and GDP growth by the second half of FY26.
Key Highlights of the GST Reform
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The proposed reform involves bringing the existing 12% GST slab down to 5%, and the 28% slab down to 18%, consolidating tax rates into mainly two slabs.
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This simplification is expected to impact approximately 11.4% of India’s Private Final Consumption Expenditure (PFCE), touching taxable consumption estimated at Rs 150-160 lakh crore.
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The reform could add Rs 1 lakh crore to overall consumption and boost GDP by 0.2 to 0.3% in H2 FY26.
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Food items such as milk, cheese, oils, sugar, confectionery, and processed food are expected to face lower GST rates, providing direct price relief to consumers.
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A range of consumer durables including air conditioners, televisions, dishwashers, and motor vehicles will shift to the reduced 18% slab.
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Reduced tax on intermediate goods like cement, tyres, and auto parts will lower input costs for construction and manufacturing sectors, potentially leading to cheaper final goods.
Impact on Consumers and Inflation
The most immediate beneficiaries of the GST rate cuts will be consumers, especially in essential food items, where lower tax rates will translate into tangible savings for households. Lower duties on consumer durables are expected to revive demand in a sector that has recently seen slowed growth—from 10.7% a year earlier to just 2.6% in Q1 FY26. This revival is anticipated as more affordable pricing triggers consumer purchases. Additionally, reduced input costs for manufacturers will have a cascading effect in curbing inflation. The report estimates that 8.5% of the overall Consumer Price Index (CPI) basket will see direct benefits from this tax rationalization. Both core inflation and wholesale price pressures are projected to moderate as a result of these GST changes.
Economic and Fiscal Implications
Timing of these reforms is strategic as they coincide with the Reserve Bank of India’s recent 100-basis-point repo rate cut. The combination of lower borrowing costs and cheaper goods is forecasted to stimulate demand for auto loans, personal loans, and credit cards. This scenario is especially positive for non-banking financial companies gearing up for a rise in festive season demand. From a broader economic perspective, the GST simplification is expected to act as a major consumption booster at a time when global trade tensions and trade tariffs pose external risks to India’s economy.
Additional Developments on GST Cess
In parallel, discussions are underway to end the compensation cess by October 31, 2025, earlier than its current scheduled end in March 2026. The cess was introduced to compensate states for revenue shortfalls after GST implementation but is expected to end soon as related loans are projected to be fully repaid by mid-October. Any surplus cess collections will be shared between the Centre and states, marking a smooth transition away from this levy.
Sectoral Insights and Market Impact
The proposed GST rate cuts are already influencing market sentiment, particularly in the Fast-Moving Consumer Goods (FMCG) sector, which is expected to benefit from increased rural and urban consumption due to improved affordability. FMCG stocks have shown positive momentum amid these expectations, even as some experts caution that structural shifts and digital disruptions may temper a full sector revival. Overall, the tax reforms complement ongoing fiscal policy and are poised to reinforce the macroeconomic recovery.
Source: Reports from Bank of Baroda and IANS Live
