What is the real fiscal cost of GST reforms?

NEW DELHI: When the Finance Ministry embarked on the GST rate rationalisation exercise, it emphasised that the move was aimed at easing the burden on the common man rather than focusing on potential revenue loss. Yet, analysts and economists continue to huddle over the ‘real’ fiscal cost of the move.

While the Finance Ministry has projected a revenue impact of ₹48,000 crore, several economists and research firms estimate the actual cost could be far higher — in the range of ₹1.5–2 lakh crore.

As per the government estimate, the gross revenue loss would be ₹93,000 crore, which will be partially offset by additional revenue of ₹45,000 crore due to shift in goods from 28% slab to 40%. The finance ministry’s assessment is based on the FY24 consumption basket, keeping static assumptions.

However, even government officials do sound too sanguine about these estimates.  Officials in the finance ministry maintained that their figures are conservative and based on historical data, though they acknowledged reforms aim at bringing relief to the masses and not to enhance revenue collection of the government. “It is very difficult to precisely say that how much will be the impact and anyway our experience says that whenever there is a rate consumption goes up and ultimately there is no revenue loss and one thing I would say that whether it is 48,000 (crore) or 93,000 (crore), this money is going to remain in the hands of common man,” said a senior official.

Former finance and economic affairs secretary Subhash Chandra Garg dismissed these numbers as “gross under-estimation.” He argued that the 2023-24 consumption-based loss of ₹93,000 crore, when adjusted to 2025-26 prices, works out to nearly ₹1.1 lakh crore annually. On top of that, the Centre will forgo the GST compensation cess, which yielded around ₹1.4 lakh crore a year. Even after accounting for recovery of about ₹50,000 crore from items in the 40% GST slab, Garg believes the net shortfall would still hover around ₹2 lakh crore.

Most economists TNIE spoke to said how the government arrived at the revenue loss estimate is not very clear, and therefore, they do not entirely agree with the figure.

Reports from Emkay Global, HSBC and Bernstein suggest the total revenue loss will likely be around ₹1.5 lakh crore once the new rate structure is fully implemented.

Bernstein’s research highlights that the merging of the 12% slab into 5% alone could wipe out ₹79,600 crore, while scrapping the 28% slab could cost another ₹1.12 lakh crore. Gains from shifting some items into higher slabs — ₹700 crore (12% to 18%) and ₹15,000 crore (28% to 40%)—would only marginally offset the damage, leaving an estimated net loss of ₹1.57 trillion for both Centre and states. HSBC estimates a net revenue loss of ₹ 57000 crore for half a year.

Gaura Sengupta, chief economist at IDFC First Bank, placed the figure somewhat lower but still sharply above the ministry’s guidance. “The fiscal cost to the Centre will be lower than states because the Centre shares 41% of CGST with state governments,” she said, pegging the overall revenue impact at about ₹95,000 crore.

Emkay Global, in its report, also flagged risks around revenue collection. “We note that there is currently pressure on the Centre’s gross tax revenue, already trailing budgeted growth (GTR growth for 4MFY26 is tracking 0.8% vs 13% BE), making the BE tax buoyancy of 1.1x appear too ambitious. However, some buffers may be available in the form of higher non-tax revenue, helped by higher RBI and PSU dividends as well as possible divestment in IDBI/PSBs’ stake sales,” it said.