GST Simplified: Will your daily budget drop as India eyes 5% & 18% rates? Potential revenue impact of Rs 43,000 crore likely in FY26 – Economy News

The big news coming in today is that the Government may “ scrap the current slab of 12% and 28% of GST,” and it“proposes two-rate structure: 5% and 18%.” This is as per ANI quoting government sources. While we are still awaiting clarity on the matter and there is no official announcement yet, the proposed removal of the 12% tax bracket may increase the overall volume of GST collected. This then may help in offsetting the impact of lower GST rates. However, this is all assumptions at the moment based on information from Government sources.

“The GST rate rationalisation move will help improve ease of doing business and also provide support to consumption via a low tax rate,” pointed out Gaura Sengupta, Chief Economist, IDFC First Bank. She added that “the fiscal multiplier of indirect tax cut is higher than direct tax cut due to wider reach. We estimate revenue impact on the centre at Rs 43,000 crore in FY26 (0.12% of GDP).

Garima Kapoor, Economist and Executive Vice President at Elara Capital reiterated that “If the proposal that is being stated in media does go through, I see this as being hugely beneficial to consumption demand, complimenting the recent tax rebates on the income side and sustained lower inflation.”

How would proposed 5% and 18% GST structure impact?

For almost every GST Council meeting held in the last 2-3 years, we have heard analysts and economists call for the need to rationalise rates. The GST rates for sectors like “textile, agriculture, fertiliser, and renewable energy” are expected to go down if the proposed structure is implemented.

In terms of rates, a bulk of items which constitute more than 70% of GST revenue rest in 18% tax slab. According to Garima Kapoor, with respect to 12% moving to 5%, she expects “gains for garments above Rs 1000, electoncis items, processed food, building materials, construction materials, machinery and certain kinds of services. It is important to note that the purpose is to correct the inverted duty structure that exists in sectors such as textiles, rubber, paper, food processing, certain kinds of electronics and solar modules, among others, where the final goods are taxed lower than intermediate goods, thereby impacting the competitiveness of the sector.”

However, one sector that might remain outside the purview of this is ‘petroleum products’. It is expected to continue to be outside GST as per the proposal buzz thus far. The special rate of 0.25% on diamond and 3% on gold and silver also needs to be monitored. There is no separate mention on this either.

Potential sectors that may now come under 5%

As per the source based assumptions on ANI, the GST on essential items like food, medicines, and education are proposed to be between 0-5%. If these measures are notified, this can gp a long way in easing the overall consumer burden.

The 5% bracket will also be watched for the potential inclusion of the insurance sector. The buzz indicates that the Government may propose GST on insurance to be also reduced to 5% or even 0 in a bid to increase overall coverage.

Relief for sectors that command 28% GST now?

The proposed scarapping of 28% GST may spell good news for ACs, TVs, refrigerators, and washing machines. The GST on these products may now drop from 28% to 18% and boost overall affordability and consumer purchasing power. GST on cement may be now reduced to 18% from 28% as well. Garima Kapoor added that, “assuming 28% slab is moved to 18%, then we are looking for relief mainly for cement, air conditioners. I do not think any uber luxury or high end item would be moved to 18%. In fact, a 28% plus some cess rate can be arrived at.”

GST on automotives

The big question mark would be now on the automotive sector. For a very long time car manufacturers have been calling for the need to rationalise GST rates. The GST on auto components, which is now 18% is one of the biggest segments that will be in focus. Luxury car components, where the current GST rate is 28% may see the tax bills coming down significantly. What needs to be watched is can they now match the 5% GST that is leveied on EV parts and electric vehicles.

Impact of GST so far

As per a survey conducted by Deloitte, industries pertaining to consumers, government and public services, global capability centre, and banking and financial services responded most positively to the implementation of GST. This was reportedly on the back of ease of doing business. When surveyed as per business size, the report notes that very large businesses received GST implementation most positively, followed by large-scale businesses.

According to a Bank of Baroda study, “MSMEs have registered notable improvement in positive perception in 2025. Across industries, it was felt that ‘compliance digitisation (real-time reporting/data analytics)’ and ‘supply chain optimisation’ were the areas in which most significant impact of GST was seen.”

Tax buoyancy, the big GST gamechanger

Upon mapping the trend in GST collections with movement in private consumption and net sales of 2,023 companies (ex-banking and finance), the Bank of Baroda report noted that “tax receipts are highly correlated with both consumption and net sales. With both nominal consumption (PFCE) and net sales, we get a correlation coefficient of 0.97. Further tax buoyancy of GST has also significantly improved from the early years of GST implementation to FY25.”

However, just to remind our readers again, the proposed 5% and 18% rate structure is only as per source-based information on ANI. There is no official Government announcement on the rates yet. All eyes are on the next GST Council meeting and the PM’s statement early this morning from the ramparts of Red Fort. He indicated GST reform are likely by Diwali.

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