Tuesday's Talking Points
Potential GST Cuts could be Another Consumption Boost!
What’s the Point?
In a recent public appearance, the Finance Minister Nirmala Sitharaman mentioned that GST rates could see further cuts, given the reduction in “Revenue Neutral Rate” to 11.4% from 15.8% in 2017. While the exact contours of this reduction are yet to be known, there are several ways this could potentially play out, such as a) Simplification of slabs from 4 to 3, b) movement of products to lower slab rates, or c) reduction in slab rates altogether. Reduction of the revenue neutral rate has potentially been aided by strong economic growth and a higher taxation base achieved by reduction in tax evasion across the system. Lower GST rates could complement other potential positives for India’s consumption growth recovery, such as income tax rate cuts, monetary easing, state government spends, and the introduction of the 8th Pay Commission. Overall, it bodes well for consumption in the economy and corporate earnings.
Note: The Revenue Neutral Rate (RNR) is the tax rate that allows the government to maintain the same revenue level before and after the implementation of a new tax system, like GST.
Numbers in Perspective

Source: Centre for Monitoring Indian Economy (CMIE). FY25 data refers to data till February 2025.
What could the rate reductions look like?
In the aforementioned public appearance, the finance minister is quoted to have said: “I have personally taken it upon myself to review the committees' work and take it to the GST Council for a final decision. We are very close to making some critical decisions on rate reductions and number of slabs," she said. "I have been clear rates will come down. When GST was launched, the revenue-neutral rate was 15.8%. Since then, it has come down to 11.4%...”
It is apparent from above that reductions in rates and slabs are both under discussion. In the past, we have seen movements of items from higher slabs to lower slabs due to public importance. For example, from 226 items in the highest slab of 28% in 2017, we saw reduction to 34 items over time, and is now largely applies only to demerit and luxury goods. In fact, multiple items have also seen reduction in rates from 18% to 12%. In some cases, parts of these goods / services saw reductions, leading to reports of higher complexities in the business environment.
What has led to the ability to reduce rates over time?
- Improvement in Tax Base: The structure of GST, with input tax credits being eligible for purchases from any supplier across the country, has led to more businesses across the supply chain registering as GST suppliers. This widening of tax base has resulted in higher tax buoyancy (Tax growth being higher than economic growth), therefore leading to potentially lower rates.
- Economic Growth: India has seen strong economic recovery since the COVID-19 pandemic, particularly with the premium end of consumption doing well. These items are typically in the higher slab of GST rates, giving GST collections a further fillip.
GST Rate Cuts could be Another Boost to Consumption
Reduction in GST rates could act as a boost to consumption, as it will have a direct impact on the price paid by consumers in the market. Previous reductions in rates have tended to show a positive impact on the overall volumes.
Lower GST rates could, in fact, complement other potential positives for India’s consumption growth, such as:
- Income tax rate cuts putting approximately ₹1 Lakh crores in the hands of consumers
- Monetary easing by RBI through rate cuts & higher liquidity, which could improve consumer lending conditions
- Rising State Government spends on welfare schemes
- Introduction of the 8th Pay Commission, along with
- The overall reduction in inflation
Near term risks include weather related risks (lower than expected rainfall), spike in inflation, and geopolitical uncertainty impacting consumer sentiments.
Overall, the potential for lower GST rates therefore bodes well for the consumption economy. In the near term, Q4 implied consumption growth is expected to be 9.9% YoY, higher than the growth reported in Q3 at 6.9% in real terms.
Sources: RBI, GST Council updates, PIB, MoSPI, and other publicly available information
About Tuesday’s Talking Points (TTP): TTP is an effort by HDFC AMC to guide key conversations in the Indian financial markets and investing ecosystem. We aspire to do this by providing relevant facts, along with our perspective on the issue at hand. If you have a topic that you would like to be featured here, please write to us at [email protected]
Disclaimer: Views expressed herein are based on information available in publicly accessible media, involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied herein. The information herein is for general purposes only. Stocks/Sectors/Views referred are illustrative and should not be construed as an investment advice or a research report or a recommendation by HDFC Mutual Fund (“the Fund”) / HDFC Asset Management Company Limited (HDFC AMC) to buy or sell the stock or any other security. The Fund/ HDFC AMC is not indicating or guaranteeing returns on any investments. Past performance may or may not be sustained in the future and is not a guarantee of any future returns. The recipient(s), before taking any decision, should make their own investigation and seek appropriate professional advice.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.