GST rate cuts could push India's FY26 fiscal deficit above target: JM Financial

The tax revenue foregone due to GST rate cuts will eventually push India's fiscal deficit above the government's target of 4.4 per cent of GDP in FY26, unless the gap is absorbed by slowing down capital expenditure intensity, according to a report by JM Financial. The report highlighted that markets had already tilted towards consumption-driven sectors after the Goods and Services Tax (GST) Council announced a rate rationalisation on August 15. However, it cautioned that a shift away from capex-oriented sectors cannot be ruled out in the coming quarters.

Certain categories face higher taxes. Coal, which earlier attracted 5 per cent GST, now falls under the 18 per cent bracket. Apparel costing more than Rs 2,500 and paper products also see their rates raised to 18 per cent from 12 per cent. Construction service contracts are taxed at 18 per cent with input tax credit, up from 12 per cent. Products such as tobacco, aerated beverages, large motor vehicles, high-capacity two-wheelers, yachts and aircraft for personal use now face the highest slab of 40 per cent, compared to 28 per cent earlier.

The GST Council's decision to simplify the structure by moving from four rates to two slabs of 5 per cent and 18 per cent, along with a special 40 per cent rate, was largely anticipated. Nearly 90 per cent of product categories saw a reduction in tax rates. "With this move we see a clear intent by the government in supporting domestic consumption through fiscal measures. The GST rate rationalisation follows the Rs 1 trillion direct tax exemption announced earlier this year.

The strength in private consumption was evident in Q1 FY26 (7 per cent YoY). The RBI however has limited room for policy easing considering the current growth and inflation dynamics, which is also signalled by the bond markets," the report said. Several categories stand to benefit from the revised rates. Fast-moving consumer goods (FMCG), fertilizers, agricultural tools and medical equipment now face a lower GST of 5 per cent compared to 18 per cent earlier.

Cement, automobiles, auto components and durable goods have been brought down to 18 per cent from 28 per cent. Medicines, edible oils, textiles and handicrafts are now charged at 5 per cent, reduced from 12 per cent. Health and life insurance have been exempted from GST, a drop from 18 per cent previously. While the GST Council has assessed the rationalisation exercise as fiscally sustainable, its projection of a fiscal impact of Rs 480 billion (0.15 per cent of GDP) is based on FY24 consumption patterns. This, it said, could be balanced by stronger GST collections.

JM Financial, however, noted that the tilt towards consumption, while boosting demand, could put pressure on the fiscal position and may lead to moderation in capex spending in FY26. (ANI)

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