Goods and Services Tax (GST) rate rejig may ease inflation by up to 75 basis points (bps) in FY26: SBI Research

In a major tax reform, the Goods and Services Tax (GST) Council at its 56th meeting approved a rationalisation of rates that could ease retail inflation by 65-75 basis points in FY27, according to a report by State Bank of India (SBI) Research. The current four-tier GST structure has been replaced with a simplified two-rate framework of 18% and 5%. In comparison, a special de-merit rate of 40% has been fixed for a limited set of goods and services. The new rates will come into effect from September 22, 2025, except for tobacco and related products, for which implementation details will be announced separately. Of the 453 goods where rates were revised, 413 items saw a reduction, while only 40 items witnessed an increase. Notably, nearly 295 items, including several essential goods, moved from a 12% rate to 5% or NIL.
SBI Research noted that the revision of GST on essentials could lower consumer price index (CPI) inflation in this category by 25-30 basis points in 2026, assuming a 60% pass-through effect on food. Additionally, the rationalisation of service rates may bring down CPI inflation by another 40-45 basis points, considering a 50% pass-through impact. Taken together, these reforms are projected to moderate inflation by 65-75 basis points in the next fiscal. The report highlighted that the effective weighted average GST rate has already reduced from 14.40% at the time of introduction in 2017 to 11.60% in September 2019. With the current rationalisation, this average could fall further to 9.50%, supported by a broader tax base and removal of distortions, reinforcing India’s aim of creating a simpler and more citizen-friendly tax system.

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