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GST 2.0 – Odds are favoring consumption boost

* In continuation of PM Modi’s announcement on GST rate rationalization on Independence Day, the 56th GST meet concluded with most consumer categories receiving a GST rate cut. Several large categories previously taxed at 18% have been unexpectedly reduced to 5%, reflecting the government’s nohalf-measures approach. The revised rates will take effect from 22nd Sep’25 onwards (except for cigarettes). This decision comes just ahead of the festive season and is likely to boost consumption across both rural and urban markets.

* In our report (dated 18th August), Consumption revival mode continues, we highlighted that the rationalization of GST rates and the simplification of the rate structure will further accelerate the consumption revival. Consumption trends over the past 2-3 years remained subdued due to commodity inflation, rising interest rates, and post-COVID pressures on both large and small businesses. While the government initially focused on infrastructure and manufacturing set-up, consumption revival has now become among the top priorities. Proactive steps, such as lowering interest rates, providing income tax relief, and implementing GST rate cuts, have been taken to revive consumption. With improving macros, easing inflation, and a favorable monsoon outlook, the consumption sector is well poised for recovery over the next 12-15 months.

* We expect most companies to pass on the benefits of the GST rate reduction to consumers (anti-profiteering clause), either through increased grammage in price-point packs or price reductions. While there may be some near-term trade-related challenges, we view these steps as structural changes that will boost consumption. We had already anticipated volume acceleration, and with the GST cuts, we expect an additional 200-300bp of volume growth across companies. Categories/companies with a higher LUP mix may particularly benefit, as the major advantages are likely to be passed on through higher grammage.

* We analyzed GST 1.0 and its impact on various companies’ operational delivery and stock performances (link). We noted that following the GST implementation (July 2017), there was a significant pickup in volume and revenue growth in the subsequent quarters. FY18 and FY19 witnessed growth acceleration of 500- 1,000bp compared to FY17 across companies. Since GST was implemented in July, there was minimal trade disruption in 2QFY18 performance. However, with GST 2.0 scheduled at the end of 2QFY26, some challenges may arise in that quarter’s performance. Nonetheless, we remain constructive on the consumption revival and continue to favor staple companies. We upgrade our rating for CLGT from Neutral to BUY. The stock has corrected ~35% over the past 12 months and is trading at a comfortable valuation of 46x and 41x P/E for FY26 and FY27, respectively. Our top picks in the staples universe are HUL, GCPL, and Marico.

Major catalyst for most essential categories – Much needed booster

The GST Council has approved a rate rationalization, shifting from the current fourtier structure (5%, 12%, 18%, 28% + cess) to a streamlined two-rate system—an 18% standard rate and a 5% merit rate. Additionally, a special 40% de-merit rate has been introduced for select categories, such as cigarettes and carbonated beverages. Key staples subcategories, such as essential Personal Care (Hair oil, Shampoo, Soaps, Oral Care) and Foods (Biscuits, Noodles, Namkeen, Dairy products, Instant coffee, Chocolates, and Fruit juices), have seen their GST rates reduce from 12%/18% to 5%. We believe Britannia, Nestlé, Emami, and Colgate will be the key beneficiaries (Exhibit 1). Based on our revenue mix assumption and GST rate change, we have calculated the GST rate reduction at the company level. Accordingly, we have also revised our revenue and earnings estimates for FY26 and FY27 to factor in the potential volume uptick and earnings revision. (Exhibit 4).

Cigarette new structure positive; need further clarity on additional cess

Currently, the total taxes on cigarettes stand at ~50-55% of the MRP (28% GST+ Cess+ NCCD), depending on the length of the cigarette, with ~6% attributed to NCCD. Under the proposed new structure, the GST rate will be reduced to 40% of MRP vs. the previous structure on transaction value. Prima facie, the structure appears to be positive for the cigarette industry. If the NCCD is also removed, the effective tax difference could be as high as 10-15%, whereas if it remains, the benefit narrows to about 5-9%. Given the earlier expectation of a tax-neutral outcome, there is a possibility of additional cess/etc on cigarettes. The GST rate change for cigarettes will not be implemented immediately (22nd September), leaving room for further updates. The government is awaiting full repayment of loans and interest obligations under the compensation cess account before implementing the new GST rate on cigarettes. The outer timeline for implementation is 31st Mar’26. For now, we are considering neutral taxes on cigarettes and are not factoring any impact into our earnings model.

Near-term distribution and channel disruptions ahead of GST transition

In the near term, the distribution ecosystem is likely to face temporary pressures as trade adjusts to the new GST rates. Distributors and retailers may reduce stocking levels ahead of the implementation date to avoid holding higher-taxed inventory, leading to short-term destocking in the channel. Companies will recalibrate packaging, grammage, and price points to fully reflect the revised tax structure, which may add to short-lived supply chain disruptions. While these adjustments could weigh on reported volumes in the near term, we believe the impact is transitory and should normalize as fresh inventory flows into the system.

GST rate cut: Colgate, Britannia, Emami, and Nestlé among top gainers

* As highlighted in Exhibit 1, the key beneficiaries of the recent GST rate cuts are companies with a large share of their domestic sales exposed to categories witnessing meaningful tax reductions. Colgate stands out, with ~95% of its domestic portfolio covered, translating into ~12% effective GST rate reduction at the company level. Britannia is another major beneficiary, with ~90% of its domestic sales mix falling under the impacted categories, also resulting in ~12% effective GST cut at the company level. Emami, with ~90% domestic sales contribution, is expected to see ~9% effective reduction at the company level, while Nestlé India, with ~80% of sales from the domestic market, benefits from ~8% cut at the company level. Other notable beneficiaries include Dabur, GCPL, HUL, Marico, and Jyothy Labs, which also stand to gain from GST rationalization, though with relatively lower exposure at the company level compared to the top four players.

* Most FMCG stocks have already rallied in the past two weeks, partly factoring in the anticipated benefits from GST rate rationalization (Exhibit 5). While the immediate stock reaction was muted due to this run-up, we believe the structural benefits of lower taxation—particularly in essential food and personal care categories—will support healthy volume-led growth over the medium term.

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