According to SBI Research, the introduction of the new system of restructuring the Goods and Services Tax (GST) into a two-rate regime may boost the level of private consumption by 80000 crore rupees. Under the revised structure, there are two slabs: 5% on basic things and 18% on regular ones. There will be a 40% increase in tax on 5-7 demerit goods pegged on pan masala and tobacco.
Analysts suggest that lower tax rates on widely consumed commodities such as food, clothing, and daily essentials are likely to drive up consumer spending. The GST reorganization is expected to contribute to a 0.6% growth in India's gross domestic product (GDP), mainly due to increased consumption by low-income households.
The report points out that the existing GST system has already experienced a decline in its considered weighted average rate, declining to 11.6% in 2019, compared to 14.4% in 2017. This average is likely to drop even further to 9.5% provided the two-tier GST is implemented, and the essential goods would then be more accessible.
The new GST model can result in a revenue loss of around 85,000 crore annually despite the possible increase in consumption. If the implementation process starts in October for the current financial year, the estimated loss would be 45,000 crores. This estimation includes the decrease in collections connected with lower taxation rates on mass-use items.
SBI Research added that household expenditures are also likely to increase by 5.31 lakh crore, combined with the recent income tax reductions announced in the Union Budget. This fiscal stimulus would amount to approximately 1.6% of GDP. To compensate for the revenue loss, the Centre might have to find new sources or enhance compliance.
The report also states that the moderate decrease in inflation might be a factor brought about by the modified GST rates. The inflation rate under the CPI can decrease to 20-25 basis points, and food inflation can reduce between 10-15 basis points. These are projections based on the pass-through of reduced tax rates by 60%.
Through service sector rationalisation, a further reduction in inflation by 5-10 basis points could occur. This is based on a projected 25% pass-through of goods and services that are not necessarily related to food. Analysts consider the possibility of inflation control as a side effect of the tax reform that may help the RBI in its monetary policy position.