Overview of GST Rate Adjustments
The Goods and Services Tax (GST) in India was introduced with a complex structure of five rate slabs and aimed at rate rationalization. The latest rate adjustments were implemented in September 2025, intended to simplify the system and stimulate demand.
Impact of GST Rate Changes on Demand
- The tax rate reductions are expected to boost demand, depending on:
- Price elasticity of demand
- Extent of tax reduction passed to consumers as lower prices
- A study by the National Institute of Public Finance and Policy (NIPFP) found varying passthrough levels:
- High passthrough for consumer durables
- Limited passthrough for food and household goods
Analysis of Consumption Patterns
To evaluate the effect of tax cuts, data from the Centre for Monitoring Indian Economy was analyzed, focusing on two consumption aggregates: total consumption and taxable consumption (excluding rent, fuel, power, and EMIs).
Average Propensity to Consume (APC)
- APC for total consumption was lower in 2025-26 compared to 2022-24, with a rise in December-February.
- For taxable consumption, an increase in APC was noted with a lag of a few months post-tax cuts.
Income Growth Analysis
- No immediate increase in income growth following tax cuts in 2025-26; increases noted only from January 2026.
- Other economic stimuli, such as a reduction in the repo rate and cash reserve ratio, were also present.
Conclusions
The evidence suggests that GST rate cuts have a nuanced impact on demand and income. Despite expectations, the APC did not show immediate increases, indicating the need for further analysis to separate tax impact from other economic factors.
