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Key Points

GST rate reductions have a stronger economic impact than direct tax cuts according to new research. When businesses pass these savings to consumers, it can significantly boost GDP growth by 20-50 basis points. The current multi-slab GST system creates complexity and compliance challenges for businesses. Simplifying rates could bring more MSMEs into the formal economy while benefiting discretionary spending sectors.

Key Points: GST Rate Cuts Outperform Income Tax Reductions in Economic Impact

  • GST cuts boost GDP by 20-50bps when benefits reach consumers
  • Income tax reductions increase disposable income but lower impact
  • Multiple GST slabs create complexity and compliance costs
  • Rate rationalization may cause Rs 0.7-1.8 trillion revenue loss
3 min read

Reduction in GST rates have higher multiple effect on economy, than cut in income tax: Report

Ambit Capital report reveals GST rate reductions have 1.08x multiplier effect, potentially adding 20-50bps to GDP growth when passed to consumers.

"A decline in GST rate has a higher multiplier effect (1.08x) than direct taxes - Ambit Capital Report"

New Delhi, August 28

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.

- ANI

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Reader Comments

R
Rohit P
Finally someone talking about simplifying GST slabs! The current system is so confusing - even small businessmen like me struggle with classification. Multiple rates only help tax consultants, not the actual economy.
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Michael C
Interesting analysis. The multiplier effect of 1.08x for GST vs direct taxes shows how consumption-driven economies work. However, the revenue loss of ₹0.7-1.8 trillion is substantial - hope the government has a plan to manage this fiscal impact.
A
Ananya R
As a small business owner, I completely agree that simpler GST will bring more MSMEs into the formal economy. The compliance cost right now is just too high for small players. This could be a game-changer for Indian entrepreneurship! 💼
V
Vikram M
Good move but implementation is key. Remember when GST was launched and businesses suffered? Hope they plan the transition properly this time. Also, increasing tax on luxury items to 40% makes sense - let the wealthy contribute more.
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Sarah B
While the theory sounds good, I worry about whether businesses will actually pass on the benefits to consumers. We've seen many cases where companies pocket the tax cuts instead of reducing prices. Need strong monitoring mechanisms.

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