Budget 2026: Boosting Consumer Confidence with Tax Reforms
India’s economy continues to demonstrate robust resilience, with domestic consumption serving as its strongest growth driver. As the Union Budget 2026 draws near, policy discussions are centered around measures that can sustain household purchasing power and support a steady demand environment. With private consumption accounting for nearly 60% of the GDP, sustaining consumer confidence is essential—especially in the context of global uncertainty. While GST 2.0, with its focus on rate rationalization and correction of inverted duty structures, is a key part of the conversation, broader tax and structural reforms will also be critical in strengthening a long-term consumption-led growth cycle.
The advent of GST 2.0 has brought substantial changes to indirect tax architecture. A move toward a simplified dual-rate structure (5% and 18%), accompanied by reduced GST rates on essential goods and consumer durables such as electronics and smaller cars, has effectively supported increased disposable incomes and improved affordability. This policy shift has contributed to a rise in retail spending and an improvement in overall consumer sentiment, evident from the growth in GST collections.
A major hallmark of the GST regime has also been the administration’s proactive engagement with stakeholders. Regular clarifications, circulars, and policy updates demonstrate the system’s responsiveness and flexibility in resolving industry concerns—enhancing trust and easing compliance burdens. Going forward, India’s GST framework should continue evolving in line with global trade dynamics. As the country strengthens its position as a manufacturing hub and an attractive location for Global Capability Centres, the GST system must remain agile. Greater digital integration, streamlined procedures, and reduced compliance friction will be central to improving ease of doing business and encouraging sustained investment.
Key petroleum products—petrol, diesel, aviation turbine fuel, natural gas—remain outside GST and continue to attract central excise and state VAT. Their exclusion leads to tax cascading, elevating operating costs in terms of logistics and transportation for businesses. Bringing these products under GST, coupled with a revenue-protection mechanism for states, would simplify taxation, ease working capital pressures, and significantly lower logistics costs. This could translate into savings across supply chains for businesses which can eventually be passed on to consumers. Similarly, expanding GST coverage to include electricity and real estate would address long-standing inefficiencies. Electricity, currently taxed outside GST, results in embedded taxes for businesses; meanwhile, in addition to GST, stamp duty continues to be applicable for real estate. Incorporating these sectors into the GST framework would enable seamless credit flow, reduce cost distortions, and contribute to more affordable housing and utility services.
OECD guidelines on modern VAT/GST systems underscore the fundamental principle of tax neutrality—ensuring the tax burden falls on the final consumer, not on businesses. The full right to deduct input tax through the supply chain, except by the final consumer, ensures the neutrality of the tax, whatever the nature of the product or services, the structure of the distribution chain, and the means used for its delivery (e.g., retail stores, physical delivery, Internet downloads). However, provisions under Section 17(5) of the CGST Act prescribe a range of ineligible credits, such as those related to construction and certain employee benefits, limiting the neutrality of the GST framework. Revisiting and rationalizing these restrictions to align with global best practices would help ensure that GST functions purely as a consumption tax rather than a cost embedded in business operations.
Another structural challenge arises from refund limitations under inverted duty structures. While refunds are permitted on inputs, they are currently not allowed on input services or capital goods. The accumulation of such credits inflates production costs and tightens working capital, limiting the extent to which businesses can reduce prices for consumers. Allowing refunds on input services and capital goods—fully or in phases—would significantly enhance competitiveness, improve liquidity, and promote more affordable pricing.
A fully functioning GST Appellate Tribunal across all states is crucial for timely and expert adjudication of GST disputes. A robust dispute-resolution framework would reduce litigation costs, provide greater regulatory certainty, and strengthen overall taxpayer confidence—factors that ultimately encourage investment and support a strong consumption environment.
The upcoming Budget presents a timely opportunity to reinforce India’s consumption-driven growth path through targeted tax measures and structural reforms. GST 2.0—with its emphasis on rate simplification, ITC rationalization, correction of inverted duty anomalies, and expanded refund eligibility—can play a pivotal role in reducing costs and enhancing affordability. When complemented by broader initiatives such as direct tax relief, MSME support, improved logistics, rural demand stimulation, and deeper financial inclusion, these reforms can unlock India’s vast domestic market and set the stage for sustainable, inclusive, and broad-based economic growth.
