The Goods and Services Tax (GST) Council, at its 56th meeting, announced a major overhaul of the tax structure, effective 22 September 2026. The current four-tier system has been rationalised into a simplified two-tier framework of 5% and 18%, with a special de-merit rate of 40% for select goods and services.
Out of 453 goods with revised GST rates, 413 items saw rate reductions, while only 40 items witnessed an increase. Nearly 295 goods, previously taxed at 12%, have now been brought under the 5% or NIL bracket.
According to Soumya Kanti Ghosh, Group Chief Economic Advisor at State Bank of India (SBI), the move is expected to lower the effective weighted average GST rate from 11.6% in September 2019 to 9.5% now, compared to 14.4% at the time of GST’s inception.
While the GST rate cut is expected to have a marginal impact on the government’s fiscal deficit, India’s CPI-based retail inflation is also estimated to come down ahead of the festive season.
Here’s how new GST rates would impact macroeconomic situations, including retail inflation and fiscal deficit.
GST Rate Cut Impact on Inflation
Since the new GST rate of essential items (around 295 items) has declined from 12% to 5% or NIL, Ghosh expects the CPI inflation in this category may also come down by 25- 30 bps in FY26 after considering a 60% pass through effect on food items.
Additionally, the new GST slabs on services also leads to another 40-45 bps reduction in CPI inflation on other goods and service items, considering a 50% pass through effect, he said.
Overall, he believes CPI inflation may be moderated in the range of 65-75 bps over FY26-27.
GST Rate Cut Impact on RBI Policy
The new GST slabs will ease CPI readings, giving the Reserve Bank of India (RBI) greater flexibility in its monetary stance. However, BofA Securities maintains that the central bank is unlikely to cut the repo rate in the near term and will remain data-dependent in its policy actions.
GST Rate Cut Impact on Fiscal Deficit
Economists believe the fiscal impact will remain limited. Madhavi Arora, Lead Economist, Emkay Global Financial Services, said the reform could add ~0.6% of GDP to domestic demand annually, benefiting sectors such as FMCG, consumer durables, and automobiles.
The Department of Revenue also expects buoyant consumption and reduced input tax credit adjustments to help balance revenue flows. The fiscal burden will be shared between the Centre and states, with states bearing the larger share of the loss.
BofA Securities continues to project the FY26 fiscal deficit at 4.4% of GDP, noting that the GST changes are unlikely to trigger any major slippage.
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