India’s planned revamp of its goods and services tax (GST) will boost household consumption and support growth, but weigh on government finances, Moody’s Investors Service said Tuesday.
Approved at a 3 September GST Council meeting and effective 22 September, the new structure consolidates most rates into two slabs—5% and 18%—with goods from the old 12% and 28% categories moving lower. A new 40% rate will apply to “sin” and luxury items such as premium cars, tobacco, sugary drinks, casinos and online gaming. Food staples, medicines and insurance will be exempt.
Moody’s said the lower effective tax rates will cut prices, bolster household demand and support growth at a time when India faces external pressures from higher US tariffs.
Boost to consumption
Household consumption, which accounts for 61% of GDP, already received a push in February from income-tax threshold hikes that reduced liabilities for middle-income households. Consumption has shown strong quarter-on-quarter growth in real terms in the three months through June, the first quarter of India’s fiscal year ending March 2026, Moody’s said.
Lower prices are also expected to help contain inflation. Consumer inflation fell to 1.55% in July from a recent peak of 7.44% in July 2023 and remains well below the Reserve Bank of India’s 4% target, giving consumption more room to drive growth.
Revenue loss looms
The tax cuts, however, come at a cost. The government estimates foregone revenue this year at ₹48,000 crore (approximately $5.4 billion) from the GST restructuring. Moody’s cautioned that the eventual loss is likely to be larger, particularly from fiscal 2027 when the new regime will apply for a full year.
Tax buoyancy is already weakening: gross revenues rose just 0.8% in April-July, compared with 21% a year earlier, while expenditure surged 20%, widening the fiscal deficit to 4.7 trillion rupees, Moody’s noted.
“The GST reforms will have mixed effects on Indian credit: while the support for growth is credit positive for some sectors, the loss of tax revenue will likely limit progress in fiscal consolidation and debt reduction,” Moody’s said.
Non-financial companies are among the likely winners. Automakers stand to gain with lower levies on small cars, two-wheelers and trucks—down to 18% from 28%. SUVs and luxury cars will be taxed at 40% but face no cess, cutting overall incidence. Consumer goods, durables and cement will also become cheaper, while non-lifesaving medicines will be taxed at 5% instead of 12%.
For insurers, GST exemptions on individual life and health policies are credit positive, though the loss of input tax credits will raise costs. Whether these are absorbed or passed to customers remains unclear, Moody’s said.
Fiscal headwinds
Moody’s cautioned that while the measures align with New Delhi’s push for consumption-led growth, they will restrain fiscal consolidation. Much of the recent surge in spending reflects the government’s effort to compensate for under-executed capital expenditure in fiscal 2024-25, it said.
Spending growth is expected to slow over the next two quarters, helping preserve consolidation trends.
