ALSO READNomura predicts, US may reduce tariffs on India by 25% by Nov; expects two rate cuts
According to ICRA, the reforms may improve consumer sentiment, though the benefits could be uneven in the short term. “Looking ahead, the improved transmission of monetary easing and the recent announcement of forthcoming GST rationalisation may help to shore up urban consumption sentiments, although discretionary consumption may see some deferment until lower tax rates are brought in,” ICRA noted.
As GST reform comes at a time when tariff tension is hurting India’s trader and exporters. Nomura said, “In our view, over the medium-term, the GST reforms are a positive, but in the near-term, expectations of lower prices (after the GST cut) will lead to lower demand in the run-up to the GST’s implementation (August-September), followed by a surge in demand afterwards (October-November), such that overall demand is largely similar.” Nomura noted that Jobs and income prospects remain the more fundamental driver of consumption.
Lower-income groups to see bigger relief if 99% of 12% slab items move to 5%
As the government is planning to stick with only two slabs—5% and 18%. Nearly 99 per cent of items in the 12% slab are expected to move to 5%. If implemented this would make packaged dairy, fruit juices, condiments, footwear and textiles more affordable.
ALSO READWill cement get expensive after GST cut? Nomura says premium players could win big
The report highlights that lower-income households will benefit the most from the cut in the 12% slab to 5%, as these items account for a larger share of their spending. “The bottom 50% of urban & rural population, measured by monthly consumption expenditure, spend 25% of their budget on goods with a 5-12% GST rate,” the report noted.
High-income households to gain from 28% to 18% GST cut
Wealthier households, on the other hand, stand to gain more from the reduction in the 28% slab to 18%, since they spend disproportionately on high-ticket discretionary goods. The report highlights, “The top 5% of the income category spends 5-6% of their budget on 28% GST items, compared to just 2-3% for the remaining 95% of the population.”
ALSO READGST 2.0: Single tax rate for small cars, SUVs & Hybrids on the cards? Maruti Suzuki poised for big gains
The top 5% of earners will benefit most from the reduction of SUVs, ACs and TVs from 28% to 18%. “Lower GST rates should benefit discretionary consumption in high-ticket items like automobiles and ACs during the festive season,” Ambit Capital noted. Ambit estimates that nearly 15% of household consumption will benefit from the proposed cuts.
States to bear two-thirds of the burden
The flip side of cheaper goods is a significant revenue loss. Ambit Capital estimates that the government could lose between ₹70,000 crore and ₹1.8 lakh crore every year from rate rationalisation. Of this, states are expected to bear nearly two-thirds of the burden since they receive a share of the Centre’s taxes and depend heavily on GST for revenues.
ALSO READJob losses, orders drying and production halts – How Trump’s tariff pain is hurting India
To balance revenues, the government is considering raising GST on luxury and sin goods — such as tobacco, aerated drinks, and luxury cars — from 28% to 40%. States such as Haryana, Maharashtra, Karnataka and Kerala, where GST accounts for nearly a third of state revenues, are likely to feel the pinch the most. Some have already started hiking property and liquor taxes to compensate.
Sept 3-4 Council meet to decide GST rejig
The reforms will require two-thirds approval in the GST Council meeting scheduled on 3-4 Sept, which includes all state finance ministers. With the ruling party and its allies currently in power in about 70% of states, Ambit Capital believes the government controls close to 80% of the vote share in the Council — enough to push the proposal through.