Tax Overhaul 2.0: India's Imminent Tax Transformation and Its Sectoral Implications
In a significant move aimed at streamlining the tax structure and bolstering economic growth, the Goods and Services Tax (GST) is being reformed to a two-slab structure: 5% and 18%, with a special 40% slab for luxury and sin goods.
The proposed changes, dubbed GST 2.0, are expected to have a profound impact on various sectors in India. Here's a breakdown of the expected effects:
FMCG
GST 2.0 reduces tax rates on essentials like snacks, juices, toothpaste, soaps, and dairy products, which will spur volume growth at low price points. This move could narrow the pricing gap between organised and unorganised players, enabling premiumisation as higher disposable incomes grow. The revival in demand, especially among the middle class during the festive season, is a promising sign for the FMCG sector.
Automobiles
The GST slab on passenger vehicles and two-wheelers is expected to drop from 28% plus cess to around 18%, substantially lowering prices and promoting higher sales volumes. Luxury cars may remain taxed at about 40%. This will benefit the auto sector’s competitiveness and consumption.
Mobile Phones
Though not explicitly detailed, the general GST slab rationalisation indicates a probable reduction for consumer electronics (including mobile phones) from higher slabs (28%) to 18% or lower, making mobile phones more affordable, thereby boosting demand and manufacturing competitiveness.
Banking & Financial Services
GST 2.0 is expected to improve sector-wide profitability by simplifying compliance and reducing tax burdens, supporting financial service providers through a more efficient tax system and enhanced consumer spending power.
Cement & Infrastructure
The sector stands to gain from GST slab rationalisation as lower taxes will reduce input costs and improve profitability, which could accelerate infrastructure projects and real estate development.
Hospitality
With simplification and reduction of GST rates, especially on essential hospitality services, the sector could see increased consumer demand and formalisation, helping recovery post-pandemic.
Quick Commerce & Logistics
Lower GST rates and simpler compliance rules are expected to reduce operational costs, increase formalisation, and enhance the competitiveness and efficiency of these fast-growing sectors.
Real Estate
Rationalised GST slabs will mitigate tax burdens on under-construction properties, make real estate transactions easier, and boost demand in the housing sector, accelerating supply and sales.
OEMs and Two-Wheeler Manufacturers
OEMs such as Maruti Suzuki, Hyundai Motor, Ashok Leyland, TVS Motor, Mahindra & Mahindra, and Eicher Motors could benefit from the GST reforms due to their exposure to small cars. For two-wheelers, GST cut could reduce prices by 6-8%, which is crucial for rural demand.
Mobile Phone Manufacturers
The India Cellular and Electronics Association (ICEA) has demanded that mobile phones be moved from the 18% slab to 5%. If accepted, this could restore affordability, pushing sales back towards 300 million annual units. Companies like Samsung, Apple's suppliers, and Indian brands like Lava could benefit from this move.
Insurance
If GST on health insurance for seniors is cut from 18% to 5%, insurance demand could rise.
Overall, GST 2.0 aims to simplify the tax structure by moving most goods and services into lower slabs (99% of items in the 12% slab to 5%, and 90% from 28% to 18%), fix inverted duty structures, free working capital, and encourage formalisation. This will likely expand consumption, improve sectoral profitability, and promote Atmanirbhar Bharat goals across sectors by Diwali 2025 and beyond.
Faster retail loan growth for ICICI Bank, HDFC Bank, IDFC First Bank is expected due to rising household consumption. The lower GST burden under GST 2.0 could increase disposable incomes, potentially leading to increased spending. Analysts estimate a multiplier effect of 1.1, meaning every rupee saved in taxes could generate more than a rupee in economic activity. The move could contribute to India's $500 billion electronics ecosystem target under Make in India.
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