GST Council Meeting : Clear shift towards supporting consumption by JM Financial Services Ltd
Clear shift towards supporting consumption
The GST council decided to move to a two rate structure – 5% and 18% with a special maximum rate of 40% with effect from 22nd September. Tax rates have been slashed across categories, with maximum benefit to FMCG, fertilizers, agricultural and medical equipments followed by cement, auto and durables. Health and life insurance will be exempt from GST. Tobacco products, luxury items will be charged at the highest rate of 40%. Although the GST council indicated that the fiscal impact of the rate rationalisation would be to the tune of INR 480 Bn (0.15% of GDP), they expect it to be offset by the buoyancy in tax collections. With this move we see a clear intent of the government in supporting domestic consumption, to cushion the economy from the external pressures. The stretch on the fiscal deficit target for FY26 may be absorbed though lower capex intensity.
* Broad-based rate cuts across categories: In a surprise move, the GST council concluded the two day event on the first day itself, announcing broad based rate rationalisation in addition to correcting the inverted duty structure across categories. The council’s decision to move from the four rate structure to two rates – 5% and 18% with a special rate of 40% was on anticipated lines. Of all the changes made, GST rates have been reduced on ~90% of the categories.
* Major beneficiaries: FMCG, fertilizers, agricultural and medical equipments benefit the most with sharpest cut from 18% earlier to 5% now, followed by cement, auto and auto components, and durables which will be charged at 18% vs 28% prior. Medicines, edible oils, textiles and handicrafts will now be charged at 5% vs 12% earlier. Health and life Insurance will be exempted (18% prior)
* Taxes hiked: The GST council hiked rates to 18% in case of Coal (5% prior), apparels costing more than INR 2500, paper products (12% prior). Services contract in the construction sector have been hiked (18% with ITC vs 12% with ITC prior)
* Special rate of 40%: Tobacco products, aerated and caffeinated beverages, motor vehicles with engine capacity exceeding 1200 cc or length exceeding 4 meters, two wheelers with engine capacity exceeding 350 cc, yachts and aircraft for personal use will attract the highest rate of 40% vs 28% earlier.
* Rate rationalisation to impact governments fiscal: As per the GST council’s assessment, the rate rationalisation exercise will be fiscally sustainable. However their estimate of the likely fiscal impact of INR 480 Bn (0.15% of GDP) is based on the consumption pattern in FY24, which is expected to be offset by buoyancy in GST collections. We expect the share of 18% slab to remain stable at 73%-74% of total revenue after this rejig, while the share of 5% slab is expected to inch up marginally to 14%. The GST council’s expectation of an effective pass on of benefits of rate rationalisation to the consumers, hints at a pick up in domestic consumption. We have been highlighting the positive impact of the coordinated fiscal and monetary actions on domestic consumption in India - mainly rural. However the tilt towards consumption will exert pressure on the government’s fiscal, which may reflect in the capex intensity in FY26.
* Clear shift towards consumption: With this move we see a clear intent by the government in supporting domestic consumption through fiscal measures. The GST rate rationalisation follows the INR 1 Tn direct tax exemption announced earlier this year. The strength in the private consumption was evident in Q1 FY26 (7% YoY). The RBI however has limited room for policy easing considering the current growth and inflation dynamics, which is also signalled by the bond markets. Hence the tax revenue foregone due to GST rate cuts will eventually stretch India’s fiscal deficit position above the target of 4.4% of GDP in FY26, unless the government absorbs it through slower capex intensity. We believe that the markets were already positioned in favour of consumption since the announcement of the rate rationalisation in GST on 15th August, however incremental move away from capex oriented sectors cannot be ruled out.
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