GST and income tax cuts to spark sustained economic growth

New Delhi, Sep 4 (PTI) GST Reform 2.0, which trims tax slabs from four to two, signals a push for demand-led growth, and together with recent income tax cuts, sets the stage for sustained economic growth, experts said.

The Goods and Services Tax (GST) Council on September 3 approved an overhaul of the indirect tax regime by taxing essentials at 5 per cent and other goods at 18 per cent. A new 40 per cent tax will be applicable on luxury and sin items.

The rejig, to be effective from September 22, aims to simplify the tax structure, ease compliance, boost disposable income and spur overall demand. Key segments/ sectors that stand to benefit include consumer staples (food and personal), retail (apparel and footwear), automobiles (especially small cars and two-wheelers), insurance, renewables and agro chemicals.

"These GST changes, combined with benign inflation, income tax cuts in February, and accommodative monetary policy, create an environment for sustained growth," HSBC Global Investment Research said in a note.

A revival in demand should also provide a much needed boost to private sector capex that has been sluggish for several years.

"With these policies in place, we expect growth to accelerate from Q4 (October-December) onwards," it said.

While HSBC said over a year, led by stronger consumption, GDP growth can rise by 0.2 percentage point, Standard Chartered Global Research said GST cut could boost GDP by 0.1-0.16 ppt and lower inflation by 40-60 bps on an annual basis.

Jefferies said the GST rate rationalisation comes at a time when the industry has been facing weak demand across categories and hence, will benefit both the consumers (lower product prices) and the companies (higher volumes).

Kotak Institutional Equities said the sharp, broad-based reduction in the GST rates of most food and key personal care categories could revive consumption partially.

"Easing commodity prices (tea palm, coffee), good monsoon, favourable base for urban consumption, the recent personal income tax reduction and the upcoming pay commission augur well for FMCG consumption in the next 12-15 months," it said.

The GST cuts, Jefferies said, should help inflation by 25 bps, increasing the probability of a 25 bps rate cut in the upcoming meeting. "An outside chance of 50 bps cut also remains." It went on to state that there's no specific need to have an anti-profiteering clause for these GST cuts announced and these will get passed on to consumers.

"Given the Rs 48,000 crore (slightly higher, based on the FY2026 consumption base) of net impact on GST revenues, we believe that the fiscal cost can be easily contained, especially for the central government," Kotak said.

Details showed that the gross revenue loss from the tax cuts is about Rs 93,000 crore in a consumption base of FY24. Revenues folded from the compensation cess to the 40 per cent tax bracket can fund Rs 45,000 crore of the loss, leaving a net loss of Rs 48,000 crore, which is 0.16 per cent of GDP, HSBC said.

"Scaling this to the FY26 base implies a net revenue loss of Rs 57,000 crore (0.16 per cent of GDP) over a year. Since only half the fiscal year is left, the implication for FY26 would be around 0.1 per cent of GDP," it said.

Standard Chartered saw pressure on the FY26 combined fiscal deficit (of 0.15-0.20 per cent of GDP) on a shortfall in direct taxes and a potential relief package for exporters. "Our base case for the combined fiscal deficit is 6.9 per cent of GDP in FY26 (with 4.4 per cent for the centre)." According to decisions taken by GST Council, tobacco will continue to be taxed at current rate of 28 per cent GST plus cess (specific and ad valorem) till the loans (tax shortfall to states) are repaid. Post this, the compensation cess will be subsumed under GST at 40 per cent on the retail selling price instead of the transaction value.

Aerated beverages will see status quo with current 28 per cent GST plus 12 per cent cess being revised to 40 per cent GST rate.

Tax on packaged water, fruit juices, drinks, and dairy products have been reduced from 18 per cent or 12 per cent to 5 per cent. Several consumer goods, taxed at 18 per cent (toothpaste/brush, hair oil, shampoo, soaps, biscuits, chocolates, Ayurveda, etc.) will now be taxed at 5 per cent. Also, other essential products, at 12 per cent (condensed milk, instant noodles, cheese, dried fruits, frozen vegetables, namkeens, etc.) will now be taxed at 5 per cent.

Morgan Stanley said local e-commerce delivery services will now attract a GST rate of 18 per cent.

"For Zomato, the food delivery services had customer delivery fee of Rs 11-12 in our calculations, which would imply a potential impact of Rs 2 per order," it said. "For Swiggy, we estimate the delivery fee to be approx Rs 14.5 per order and hence the potential impact to be Rs 2.6." On Blinkit, the delivery fee was part of revenues and was already attracting GST. PTI ANZ HVA