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We see the GST Council’s unanimous confirmation of GST rate simplification as a substantive growth-positive reform. It also makes the government’s stance more contemporary: in today’s India, small cars are not luxury goods, and branded FMCG do not warrant high rates. These changes should improve compliance, reduce disputes, and cut some working capital strain from delayed tax credits. We continue to believe that the consumption stimulus (~0.5% of GDP), is likely to be paid for by compensation cess being subsumed, improved demand and tax buoyancy, making it broadly neutral fiscally.
GST Council unanimously approves 2-slab structure, largely as expected
In a unanimous decision, the GST Council confirmed the discontinuation of the 12% and 28% slabs, leaving only two primary rates of 5% and 18%, plus 40% for sin/demerit goods. This was largely as expected. The new updates were i) effective date of September 22 (the first day of the festival of Navratri), which would also be the last day for all compensation cess on all products except tobacco; ii) Some items at 12% were moved to 18%: business air travel, work contracts/professional and business services; iii) FMCG from 18% to 5% (Fig 2: this had appeared in the media though: link), and several food items cut to zero; and iv) coal (earlier effectively ~40%: 5% GST + Rs400/t cess) moved to 18%: buyers now get full input credit.
Clean structure to lower compliance/litigation costs, working capital needs
We see the primary purpose as reform and simplification, even though the immediate outcome is a boost to consumption. They also make contemporary the indirect tax structure: for example, the state no longer sees a small car as a luxury, and beauty products are staples, not warranting a high rate. ~75% of total taxes are likely to be collected at the 18% rate now, but the effective rate (given exemptions/zero-rated goods) may now fall to 10%: this should improve compliance and make the overall tax burden more progressive. Several inverted duty structure problems have been corrected (should help with working capital, as ITC refunds were messy) and classification-related issues are being minimized (e.g. all FMCG at the same rate), ensuring predictability and reducing leakage/disputes. GST return filing has been eased: the compliance burden fell disproportionately on smaller firms.
Fiscal stimulus ~0.4pp of GDP; muted impact on government borrowing
Based on FY24 consumption patterns, and with no other changes, the government estimates ~Rs. 930bn of revenue loss over 6 months (~1.8tn over 1Y): a fiscal stimulus of ~0.5% of GDP. However, the compensation cess (off-balance-sheet for FY23-26) being subsumed into GST structure would result in additional revenues of Rs. 450bn (~0.9tn over the next 1Y). As highlighted earlier, once adjusted for lower input-tax credit (ITC), revenue buoyancy from stronger demand (price cuts of 7-10%) and higher formalization, we expect almost no revenue loss to the general government.
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