GST reform | Some gains will be offset by US tariffs: Gaura Sen Gupta

India’s sweeping GST overhaul, collapsing the levy into a simpler two-rate structure, could give household consumption a timely festive season boost, though the impact may be tempered by US tariffs, IDFC First Bank Chief Economist Gaura Sen Gupta told The Federal in an interview.

Also read: GST reform shows how indirect taxes can be made even more indirect

She estimates the tax cuts will add about 0.6 percentage points to growth over 12 months, keeping her FY26 GDP forecast unchanged at 6.6 per cent.

Edited excerpts:

With Indian exporters bracing for a hit from the Trump administration’s tariffs, the government’s move to rationalise GST into two slabs seems aimed at boosting the domestic economy. Do you believe this reform will meaningfully spur household consumption, and how do you see the 5 per cent to 18 per cent structure shaping retail demand?

It’s a very good move. Beyond the significant tax cuts, the shift has been even more generous than expected, with many items not just moving from 28 per cent to 18 per cent or from 12 per cent to 5 per cent, but even some from 18 per cent brought down to 5 per cent. The timing, aligned with the festival season, and the quick implementation are both positives. We estimate growth support of about 0.6 percentage points over a 12-month period, keeping our FY26 GDP forecast unchanged at 6.6 per cent, since this was already factored in after the Prime Minister’s 15 August indication. However, some gains will be offset by tariffs — if the 50 per cent tariff stays, it neutralises the GST boost. Our baseline assumes tariffs ease to 25 per cent by November-December and remain there, in which case GDP should still come in at 6.6 per cent, with GST adding a positive push.

Also read: GST reforms are mere tokenism, don't address systemic issues: TN MSMEs

The move to a simplified two-tier GST regime could trim government revenues by an estimated Rs 48,000 crore, based on 2023-24 consumption figures. Do you see this as a worthwhile fiscal sacrifice if it accelerates growth and consumption?

Honestly, this move is much more effective than the income tax cut. While the new income tax scheme has brought a substantial reduction, with over 70 per cent of taxpayers shifting to it, the impact hasn’t yet been visible and may take longer to play out, partly because the number of people paying income tax in India is very small. In contrast, indirect taxes like GST have a far wider reach, and the cuts have been targeted at mass-market items where the effect is immediate. Coming just ahead of the festival season, the GST rationalisation is well-timed, and from a tax perspective, it offers a stronger boost to growth than the income tax cut.

Given that GST is a major revenue source for states, to what extent should the Centre step in with compensation mechanisms, especially for states more reliant on the abolished 12 per cent and 28 per cent slabs?

The Centre has pegged the total cost to both Centre and states at Rs 480 billion for a 12-month period, though it wasn’t explicitly clarified in the press conference whether this figure applies to both or only one side. Our interpretation is that it covers Centre plus states, which means the fiscal impact on the Centre alone will be minimal in FY26, as only half the year remains — equivalent to just 3 per cent of indirect taxes — with roughly 60-70 per cent of the burden falling on states. Since the amount is relatively small, no compensation mechanism has been announced. Meanwhile, all cesses except tobacco will end, and the tobacco cess itself will remain only until the COVID-era loans given to states are repaid, reportedly by November. While the government estimates the fiscal cost at Rs 480 billion, our assessment is higher at about Rs 950 billion for Centre plus states, which equals 0.3 per cent of GDP over a 12-month period. For FY26 alone, with half the year remaining and the Centre sharing 41 per cent of CGST with states, the Centre’s hit will be even smaller, while the states’ loss works out to less than 0.2 per cent of GDP. Given the Centre’s more precise data and relatively modest fiscal impact, it is unlikely that a compensation mechanism for states will be introduced.

Also read: 40 pc GST: Full list of ‘sin goods’, luxury items and IPL match tickets

As someone who has emphasised capital expenditure and consumption as growth drivers, how do these GST reforms complement that framework and do they strengthen the case for RBI to consider further rate cuts in FY26?

We still expect one more rate cut, most likely in December, though October remains a possibility. RBI will want to gauge the impact of GST during the festival season and also await clarity on bilateral tariffs, which the government has indicated could be reduced by November-December. While Q1 GDP numbers were exceptionally strong, much of that came from base effects, government capex growth, front-loaded exports to the US, and a favourable GDP deflator — factors unlikely to sustain in the second half. Growth is expected to average 7-7.5 per cent in the first half but moderate to just above 6 per cent in the second half as revenues soften and capex slows. Though RBI has highlighted forward-looking inflation — 4.9 per cent in Q1 and projected at 4.4 per cent in Q4 — as a constraint on easing, we believe the forward-looking growth trajectory matters as much. Given the strong Q1 base, RBI is more likely to wait for festival demand and tariff clarity before cutting rates in December.

The government is considering zero-rating insurance premiums from GST — how could this affect household financial behaviour and the broader life and health insurance market?

It’s not just insurance — medical products, devices, and medicines have also seen significant cuts, with many shifted to the 5 per cent GST category. For insurance specifically, a zero-tax rate is being proposed. The key question is how this translates into premiums, because without GST, there’s also no input credit, so the net effect on costs remains to be seen. If premiums do fall meaningfully, it could incentivise more people to opt for this essential service, but the actual incremental impact on pricing will need to be watched.