India's GST overhaul lowers prices but strains public finances

India's overhaul of the goods and services tax, approved by the GST Council on September 3 and taking effect on September 22, is expected to lower consumer prices and lift household spending but will widen the strain on public finances, analysts and ratings agencies said. The reform simplifies rates into two main slabs, 5 percent and 18 percent, with a separate 40 percent levy on so‑called sin and luxury goods, and exempts staples such as food, medicines and life and health insurance.

The changes reclassify a wide range of items. Nearly 90 percent of product categories saw cuts, with fast moving consumer goods, fertilizers, medicines, edible oils, textiles and handicrafts moved to 5 percent from higher bands, and cement, automobiles, auto components and durables reduced to 18 percent from 28 percent. Health and life insurance policies were made exempt. At the same time, some categories face higher rates: coal has been shifted from 5 percent to 18 percent, and a number of luxury goods including premium cars, tobacco, sugary drinks, casinos and online gaming will draw the new 40 percent slab.

The government has estimated a net revenue loss of around Rs 48,000 crore for the current...