The transition to the Goods and Services Tax (GST) was a watershed moment in India’s taxation history. The rationalisation of the tax slabs across most items in 2025, which will be implemented from September 22, will prove to be another formidable feat. Under the new structure, the 12 per cent tax slab has been merged with 5 per cent and 28 per cent has been subsumed into 18 per cent. Some items are moving to the nil as well as 40 per cent categories, with the latter in place of the levy of cess atop the 28 per cent GST rate. Accordingly, the rationalisation effectively moves the median tax rate from 12 per cent to 5 per cent.
The rate reduction is sure to be cheered by consumers and producers alike. The initial announcement of the rationalisation by Diwali had raised some concerns over deferment of purchases and treatment of tax on inventories. However, the implementation date being advanced by nearly a month to September 22, that is, the start of the festive season, has assuaged many of these concerns. Higher sales within the last eight days of September would also allay concerns about the potential negative impact of deferred purchases on GDP growth in the second quarter. The domestic consumption and sentiment boost will help offset the worries triggered by the US tariffs and penalties on exports. Nevertheless, job losses in some sectors would still constrain the demand of associated households.
The Central GST (CGST) accounts for less than one-fourth of the Centre’s tax revenue receipts. But the State GST (SGST), which is levied on specified goods and services consumed within a state, contributes more than 40 per cent to the state’s own tax revenue, highlighting its criticality. Further, CGST is part of the shareable taxes, and approximately 41 per cent of it is shared with the states; therefore, CGST revenue given up by the Centre is automatically foregone by the states through lower central tax devolution.
In the 2025-26 budget estimates, the combined SGST collections of 28 states were indicated to rise by 22 per cent from the year-ago level to Rs 10.8 trillion. However, during April-August, SGST collections have increased by a modest 5.8 per cent. The actual SGST collections will be impacted by several domestic factors, especially the new GST rates, as well as by the developments with the US tariffs and other geo-political issues. Additionally, in the Union Budget, the GoI had indicated tax devolution of Rs 14.2 trillion for all states and till August 2025, it has devolved Rs 5.3 trillion. The balance amount transferred in the remainder of this fiscal will take a cue from how CGST collections evolve post the rationalisation.
Now to the matter of revenues foregone. The revenue secretary has placed the revenue implication of the rationalisation at Rs 48,000 crore based on the GST data for 2023-24. We have presumed that this is roughly equivalent to the revenue to be foregone in the second half of the year by the Centre and the states. Based on this, the total annualised “loss” works out to around Rs 96,000 crore, similar to the estimated revenue foregone from the personal income tax changes announced in this year’s budget. The second-round impact of enhanced consumption would absorb some of the revenue foregone. Within the assessed first-round revenue to be foregone, we estimate the share of the states at around Rs 67,700 crore and the Centre’s net loss at around Rs 28,300 crore. The revenue foregone as a percentage of revenue receipts will vary across states based on the share of SGST and central tax devolution in their revenue pie. The states that run revenue deficits will need to effect a greater adjustment in their fisc, through raising other revenues or finding expenditure savings.
GST rationalisation is a welcome and well-timed move. Its positive implications for consumer demand and producer sentiment will help to absorb a portion of the negative impact of US tariffs and penalties. Private sector capex decisions may get a boost for domestic consumption-oriented sectors. However, exporters may still feel jittery about embarking on fresh capex. The revenue foregone will need to be offset through other streams or expenditure rationalisation. The final size of the fiscal stimulus remains to be gauged.
The writer is chief economist, head- research & outreach, ICRA