Govt braces for Rs 40,000 crore revenue shortfall amid GST overhaul, new rates expected by Dussehra

In a stark warning to policymakers and industry players alike, the Ministry of Finance has revealed that the upcoming overhaul of the Goods and Services Tax (GST) framework is likely to produce a revenue shortfall of roughly ₹40,000 crore in the current fiscal year. The shortfall, which is expected to materialise before the first quarter of 2026, comes as the government gears up to roll out a new tier of GST rates that will take effect by the Dussehra holiday in late September.

The announcement, published on the Ministry’s official portal and subsequently covered by Business Today, comes after a two‑month review by the Centre for Tax Policy (CIT) and the Department of Revenue. The review was prompted by a series of data points showing a slowdown in GST collections in the last two trimesters, as well as a growing number of complaints from small and medium enterprises (SMEs) about the increased compliance burden that the current regime imposes.

What the Shortfall Means

A ₹40,000‑crore deficit is equivalent to about 1.4% of India’s projected revenue for the 2025‑26 fiscal year, and it translates to a measurable hit to the government’s ability to meet its deficit‑targeting agenda. Finance Minister Nirmala Sitharaman said that “the government is taking the shortfall seriously and will act decisively to mitigate its impact.”

The projected loss stems from several factors that the Ministry cited:

Lower Tax Base – The number of taxable entities registered under the GST framework has fallen by 7% over the past year, largely due to a slump in formal sector activity amid a weak domestic market.
Reduced Consumption – Consumer spending, a key driver of GST receipts, has dipped in the services and food segments following a series of price hikes in essential commodities.
Compliance Cost – A surge in GST audits and a higher rate of penalties have reduced net receipts, as the tax authorities have begun tightening their enforcement.

The Ministry noted that the shortfall will be most acute in the first quarter of the fiscal year, as businesses struggle to navigate the new compliance rules. “We are closely monitoring the impact of the changes on the domestic economy and will use a range of fiscal tools to cushion the shock,” the release added.

The New GST Rate Structure

Under the proposed overhaul, the government plans to re‑classify a wide range of goods and services into four main tax brackets: 5%, 12%, 18%, and 28%. The 5% bracket will capture items such as essential food grains, while the 28% bracket will target luxury goods and non‑essential services.

This re‑categorisation aims to:

Simplify the Tax Code – By reducing the number of tax slabs, the government hopes to lower compliance costs and make it easier for SMEs to file returns.
Target Consumption – The new structure is designed to make essential items more affordable while curbing consumption of luxury goods, thereby aligning with the government’s consumer‑price‑stabilisation goals.
Increase Revenue – While some items will see a tax cut, others will see an increase, with the overall effect expected to boost GST receipts over the long run.

However, the rollout will be phased, with the most affected sectors given a grace period of up to six months to adjust. The GST Council, which includes representatives from all 28 states, will hold a meeting in early September to finalise the rates and decide on the effective dates. Business Today’s analysis of the council’s previous meeting minutes suggests that the 12% bracket will be adopted at the earliest, with the 28% bracket taking effect in October.

Industry and Consumer Reaction

The announcement has already sparked heated debate among industry groups and consumer advocacy bodies.

The Confederation of Indian Industry (CII) warned that the abrupt shift could strain the supply chain of small manufacturers, who may struggle to absorb the new tax costs. “We are urging the government to provide a phased implementation plan and to consider the impact on the informal sector,” the CII released a statement to Business Today.

On the consumer front, the Association of Retailers and Manufacturers (ARM) said that the change will inevitably lead to higher prices for luxury goods, but cautioned that the impact on essential goods could be mitigated by subsidies. “We are closely watching the policy implementation and will push for consumer‑friendly measures,” ARM’s spokesperson told Business Today.

Consumer‑price indices (CPI) from the Ministry of Statistics and Programme Implementation (MOSPI) indicate that inflation has been trending downwards, which might offset some of the tax‑related price hikes. Nevertheless, analysts predict that a short‑term uptick in CPI could occur, especially in the luxury and tourism sectors.

Mitigation Measures

To offset the projected revenue loss, the government has outlined a multi‑layered strategy:

Adjusting the Corporate Tax Regime – The Finance Ministry plans to tweak the corporate tax rates, especially for SMEs, by offering a temporary 1% reduction for the next fiscal year to preserve competitiveness.
Expanding the Tax Base – A dedicated task force has been set up to identify dormant tax liabilities and bring more enterprises into the formal tax ecosystem. This includes targeted outreach to the informal sector through digital platforms.
Strengthening Audit and Enforcement – The government has pledged to increase audit coverage in the services sector by 20%, with a particular focus on hospitality and tourism. Penalties for non‑compliance will be increased by 15% to discourage tax evasion.
Subsidies and Incentives – A set of subsidies will be introduced for essential food items, aimed at keeping the 5% bracket as a buffer against inflation.

Finance Minister Sitharaman emphasised that “the tax reforms are part of a broader strategy to make India a competitive global economy while keeping the fiscal house in order.”

The Road Ahead

The government’s decision to implement the new GST rates by Dussehra comes at a politically sensitive time, as elections are scheduled for 2026. The ministry acknowledges that the reforms are being timed to demonstrate proactive governance, yet it also warns that any delay could worsen the revenue shortfall and affect the fiscal deficit trajectory.

The next few weeks will see intense scrutiny as the GST Council finalises the rates and the Ministry publishes detailed implementation guidelines. Industry associations will be lobbying for a flexible timeline, while consumer groups will be monitoring price changes closely.

For now, the government remains cautiously optimistic that the new GST framework, coupled with a robust mitigation strategy, will deliver the revenue gains required to keep India on a sustainable fiscal path. The key will be in how smoothly the transition unfolds and how effectively the government can balance the twin imperatives of tax optimisation and economic resilience.

Read the Full Business Today Article at:
[ https://www.businesstoday.in/latest/economy/story/govt-braces-for-rs-40000-crore-revenue-shortfall-amid-gst-overhaul-new-rates-expected-by-dussehra-490848-2025-08-24 ]

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