The resulting surge in aggregate demand and consumption-led economic activity can create a positive multiplier effect.....

 A significant decrease in Goods and Services Tax (GST) rates could lead to a revenue loss of approximately ₹48,000 crore annually, but this could be offset by a substantial boost in consumption-led economic activity. Experts estimate that the tax cut would increase overall demand by a similar amount, leading to greater overall spending and potentially boosting tax revenue collection through higher GDP growth and improved compliance. For instance, the SBI report projects that reforms could result in additional consumption expenditure of over ₹5 lakh crore, generating an estimated ₹52,000 crore in additional GST revenue, surpassing the projected loss.

How Lower GST Boosts Tax Revenue

Increased Disposable Income and Spending:

Lower GST rates on everyday goods and essential items directly increase household disposable income, leading to greater overall demand and consumption.

Multiplier Effect:

This increased spending creates a ripple effect through the economy, driving higher production, more sales, and consequently, higher tax collections across various sectors, particularly for indirect taxes.

Boost to GDP Growth:

The surge in consumption and economic activity can lead to higher Gross Domestic Product (GDP) growth.

Improved Tax Buoyancy and Compliance:

Higher economic activity and increased consumer spending may also improve tax buoyancy and encourage better compliance, further enhancing revenue.

Offsetting Revenue Losses:

The economic stimulus from lower GST, combined with enhanced compliance and a shift of certain goods to a higher tax bracket, is expected to offset the direct revenue losses from the rate cuts.

Examples of GST Rate Reductions and Their Impact

Consumer Goods:

Rate cuts on items like TVs, air conditioners, and dishwashers directly benefit consumers by reducing prices and increasing purchasing power.

Services:

Lower GST on hotel stays, gyms, and salons also reduces costs for citizens and provides a stimulus to the hospitality and service sectors.

Building Materials:

Reductions on cement and other materials provide relief to the real estate sector, potentially lowering construction costs and benefiting homebuyers.

In summary, while a direct reduction in GST rates leads to foregone revenue, the resulting surge in aggregate demand and consumption-led economic activity can create a positive multiplier effect, ultimately leading to higher overall tax revenue.