A decline in the Goods and Services Tax (GST) rate has a higher multiplier effect of 1.08x compared with direct taxes, according to a report by Ambit Capital. If the benefits of this cut are passed on to consumers, it can boost the country’s GDP growth. It stated “A decline in GST rate has a higher multiplier effect (1.08x) than direct taxes. If passed on to consumers, it can add 20-50bps to GDP growth”.
The report said, a decrease in income tax rate would have a positive multiplier effect, leading to a rise in private consumption due to higher disposable income. But compared to income tax and corporate tax, GST has the highest multiplier effect because it is an indirect tax that applies to the entire population at the point of sale.
The GST rate reforms are on the way and will mark the second major fiscal stimulus in FY26, after the personal income tax cuts announced earlier in the budget by the government. Currently, GST has several slabs, nil tax rate, 3 per cent (mainly on gold, silver, diamond and jewellery), 5 per cent, 12 per cent, 18 per cent and 28 per cent.
In addition, there are special rates of 1.5 per cent on cut and polished diamonds and 0.25 per cent on rough diamonds. On top of these, some items also attract additional taxes as cess. According to the report, having multiple rates has increased complexity in the system. Products from the same category can often face two different GST rates because of small differences in their features.
For example, the report mentioned that the toy industry has seen such issues. This complexity not only raises the cost of tax compliance for businesses but also leads to frequent misclassification of goods into lower tax brackets, which in turn causes revenue losses.
The report estimated that rationalisation of GST rates could lead to an annual revenue loss of Rs 0.7-1.8 trillion, with states carrying a higher share of the burden. To partly offset this revenue uncertainty, Ambit suggested that a higher GST rate of up to 40 per cent could be applied on sin and luxury goods.
The report expects that the lower GST rates will likely to benefit discretionary consumption in high-ticket items such as automobiles and air conditioners during the peak festive demand. On the other hand, categories such as FMCG and cement may only see marginal gains due to their inelastic demand.
The report also highlighted that simplification of GST rates could bring more businesses into the tax system. Several micro, small and medium enterprises (MSMEs) that earlier avoided GST may realise that the benefits of being part of the formal economy will outweigh the costs. Over time, this will help expand the GST tax base and improve compliance.
