UBS Report: GST Rate Adjustments Pose Manageable Fiscal Impact

Speedy Summary

• UBS estimates that India’s proposed GST rate rationalisation will lead to an annual revenue loss of Rs 1.1 trillion (0.3% of GDP), which is considered manageable.
• For FY 2026, a revenue loss of Rs 430 billion (0.12% of GDP) is expected to be offset by surplus cess collections and higher-than-budgeted RBI dividend transfers.
• The GST multiplier (-1.08) demonstrates that changes in GST directly influence consumption, more considerably than personal income or corporate tax cuts.
• PM Modi announced next-gen GST reforms during his Independence Day speech aimed at benefiting consumers, msmes, and small industries before Diwali.
• The Central goverment has proposed replacing the current GST slabs (12% and 28%) with a simplified two-tier system: 5% and 18%.
• luxury/sin goods will remain taxed at a special slab rate of 40%, while processed foods, garments, footwear, tractors, hotels, etc., are likely to benefit from lower rates.
• compensation cess collection ending early in March 2026 would allow fiscal room for aligning rates under the new structure.
• UBS suggests lowering GST rates could ease inflationary pressure through deflationary effects and pave the way for interest rate cuts by up to another 50 basis points in FY26.

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