Lower-income households, particularly in rural areas, are set to benefit the most from a 12% slab reduction, as over 20% of their consumption falls under GST rates between 5-12%. In contrast, upper-income households, especially the top 5%, would benefit from cuts in the 28% slab.
Government data on personal consumption indicates nearly 60% of household spending is on items that are either exempt from GST, taxed up to 5%, or outside the GST ambit, such as alcohol and motor fuels, according to a note by Ambit Capital.
Estimates suggest the Centre and states together could lose between Rs 0.7 trillion and Rs 1.8 trillion in revenues. This revenue loss acts as a fiscal stimulus, following the earlier income tax rate cuts. According to multiplier effect calculations, GDP could gain 20-50bps if the price reductions are passed on and government expenditure is maintained.
States hit most
States are likely to bear a disproportionate share of the revenue impact. While ideally the Centre and states would share the burden equally, transfers from GST and other Centre-collected taxes mean states effectively bear two-thirds of the losses. The most affected are expected to be major business and consumption hubs such as Maharashtra, Karnataka, and Haryana. Slowing GST collections are already constraining state capex, prompting some to increase liquor taxes, property registration fees, or VAT.
Clarity on the Cess is crucial. Initially imposed to ensure states’ GST growth of at least 14% between FY18-22, the Cess has since been used to repay Centre loans taken during COVID-19, scheduled to end by October. GST rate cuts may trigger demands from states for compensation, particularly those heavily dependent on the Cess.
Sectorally, autos and air conditioners appear to be immediate beneficiaries. However, high dealer inventories—exceeding 30 days and potential consumer delays in purchasing could slow demand in 2QFY25 and parts of 3QFY25. Market dynamics will depend on whether dealers pass on the reduced rates and whether government refunds are provided for inventory bought at higher GST rates.
Original source: bfsi.economictimes.indiatimes.com
