In a major tax policy shift, the GST Council on Wednesday announced that no cess will be levied on goods and services, except for tobacco, which will continue to attract the tax until states clear the loans taken during the Covid-19 crisis. The Centre expects these repayments to be completed by November 2025.
While the move is being praised as a big step towards simplifying India’s tax regime, it comes with heavy costs. Government estimates suggest the new structure could reduce revenues by Rs 48,000 crore in a year. But analysts believe the actual hit could be much sharper. According to IDFC FIRST Bank Research, after accounting for consumption shifts and cess transfers, the net revenue loss may touch Rs 95,000 crore, about 0.3% of India’s GDP.
The net cost to the Centre and the state is estimated at Rs 95,000 crore.
IDFC First Bank estimates that the net revenue loss could reach Rs 95,000 crore. IDFC First Bank stated, "According to our estimation, the total cost to the central and state governments, taking into account the utilisation of surplus cess collections in the GST compensation account, is estimated to be Rs 95,000 crore, which corresponds to 0.3% of GDP."
In past years, the GST cess on sin goods like alcohol & tobacco has been an essential source of income, bringing in nearly Rs 1.5 trillion each year. Under the new system, the 40% tax rate on these goods will now go directly into GST collections instead of the Compensation Fund. However, experts warn that losing this cess revenue could put pressure on state finances in the short term.
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IDFC FIRST Bank: Limited Financial Slippage Risk from GST Cut
Despite the removal of cess, economists do not see a fiscal crisis playing out. IDFC FIRST Bank estimates the Centre’s additional burden in the second half of FY26 to be just 0.07% of GDP. The report said, "Fiscal slippage risk to the Centre remains low from the GST cut.”
With higher-than-expected excise duty receipts, more substantial PSU dividends and the RBI’s record Rs 2.7 trillion surplus transfer, the government appears well-placed to stick to its fiscal deficit target of 4.4% of GDP.
Economists' prediction of a 0.6% rise in GDP
On the brighter side, lower GST rates are expected to fire up demand. Analysts predict that the cut will lift consumption across FMCG, consumer durables, pharma, cement, and small vehicles. IDFC FIRST Bank projects a 0.6% boost in GDP growth, taking India’s overall growth outlook for FY26 to 6.6%.
Up to 1% CPI Inflation Drop Possible
Consumers, too, could benefit directly. If companies pass on the tax relief, headline CPI inflation may ease by up to 1% point. Even with only partial pass-through, retail inflation is expected to fall by 0.6–0.8%, with FY26 projections revised down to 2.4% from 2.7%.
So, is this reform a fiscal gamble or a growth catalyst? On one side is the prospect of a Rs 95,000 crore annual shortfall, and on the other, the promise of stronger GDP growth and lower inflation. Economists say the gamble might just be worth it. India’s consumption-led economy could end up gaining more than it loses.
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