R. Suryamurthy
India is on the cusp of its most ambitious tax reform in nearly a decade, preparing to roll out a sweeping overhaul of its Goods and Services Tax (GST) that policymakers are billing as a surefire way to boost consumption and tame inflation. But a closer look at the numbers and potential fallout for key sectors suggests the path may be more complex than the government’s optimistic projections.
Dubbed “GST 2.0,” the proposed reform aims to simplify the current four-tier system into just two primary tax brackets: a 5% rate for essentials and an 18% standard rate for most other goods and services. A special 40% rate would be reserved for a narrow list of luxury and “sin” items, while less than 1% of goods would remain in the existing 0.25% and 3% special slabs. This simplification would see nearly all items currently taxed at 12% drop to 5%, and 90% of goods at 28% shift to 18%.
Conflicting Forecasts Spark Fiscal Debate
The reform’s potential impact on government finances is a point of contention among analysts. SBI Research estimates a manageable annual revenue loss of about ₹85,000 crore ($10.2 billion), arguing that rising consumption and a surplus in the compensation cess fund will cushion the blow.
However, other forecasts paint a far bleaker picture. IDFC First Bank predicts a staggering loss of ₹1.8 trillion ($21.6 billion), or 0.5% of the country’s GDP, with state governments bearing a disproportionate share of the burden. UBS Securities offers a middle ground, forecasting a loss of around ₹1.1 trillion ($13 billion), which it believes is “manageable” due to the central bank’s recent bumper dividend. The wide gap in these estimates underscores the uncertainty surrounding the reform’s fiscal arithmetic.
With the compensation cess—a key revenue stream for states—set to expire in March 2026, many state governments could face a serious fiscal squeeze, potentially forcing them to cut spending or increase borrowing.
Insurance: A Complex Test Case
One of the most significant and debated proposals is the move to exempt life and health insurance premiums from GST. Proponents, such as Deepak Kumar Jain, Founder and CEO of TaxManager.in, argue this is a “win-win situation,” as it would directly reduce premiums by 18%, making insurance more accessible to middle-class families and first-time buyers.
However, experts caution that the benefits may not be fully realized by consumers. Jignesh Ghelani, a Partner at Dhruva Advisors, notes that while term and health insurance might see significant relief, traditional life insurance and Unit Linked Insurance Plans (ULIPs) would likely see limited price reductions because much of the premium is tied to investment, not risk coverage.
Adding a legal perspective, Shivam Mehta, Executive Partner at Lakshmikumaran & Sridharan Attorneys, warns that insurers could face a significant financial hit. “It would be unfair if insurers are asked to pass on the full benefit of GST exemption, given that they would lose out on input tax credit (ITC) which will squeeze their margin,” Mehta said. “Ultimately, whether policyholders truly benefit will depend on how effectively those savings are transferred in practice.”
Despite these complexities, industry leaders remain optimistic. Jude Gomes, MD & CEO of Ageas Federal Life Insurance, called the move a “progressive step” aligned with the government’s goal of “Insurance for All by 2047.”
Inflation and Simplification: A Mixed Bag?
The government projects that the GST changes could lead to a 20–25 basis point drop in headline CPI. Others, like IDFC First Bank, are more bullish, forecasting a 60–80 basis point reduction. However, economists remain cautious about how much of this will be passed on to consumers.
Madan Sabnavis, Chief Economist at Bank of Baroda, warns that the ultimate inflation outcome “will depend on how individual tax rates filter through the CPI basket,” adding that the shift of some goods to the new 40% slab could introduce upside risks.
While the new two-slab structure is widely seen as a positive step toward simplification, political hurdles remain. The Centre’s upbeat narrative clashes with state governments’ concerns about potential revenue losses. The GST Council is expected to meet in September to find a fragile consensus on the final structure and implementation, with the outcome poised to shape India’s economic trajectory for years to come.