The new goods and services tax (GST) rates will benefit 11 of the top 30 consumption items in rural and urban areas, and a third of an average consumer’s monthly expenditure. These 11 items include essentials (e.g., milk products), discretionary products (such as automobiles and beauty services), and goods experiencing a surge in demand over the past few years (processed food). Experts say tax cuts on essentials should improve purchasing power, especially for low-middle-income segments.

Milk products taxed above 5% saw a decline in the GST rate (ultra-high-heat milk to 0% from 5% and butter and ghee to 5% from 12%). Medicines taxed above 5% were brought to the 0% or 5% slab. These items account for 28% of rural MPCE and 26% of urban monthly per capita expenditure (MPCE). Additionally, for some categories, the GST rates have been pared for only lower-value items (e.g. clothing, footwear, two-wheelers). This complements the income-tax relief announced in the budget for this segment and will support demand. 

However, it is believed that the final impact on consumption will depend on the degree to which producers pass the rate cuts to consumers. “Global evidence confirms that pass-through of tax changes varies significantly across countries. Furthermore, the adjustment can take time. For India, we expect the impact of GST cuts on consumption to play out over this fiscal and the next,” ratings agency Crisil says in its latest report on GST 2.0 impact on consumption.

The Crisil report states that reducing the rates of these essential items to the lowest slab should help boost purchasing power. Some fast-growing items: Processed foods face a lower average GST, with the rate reduced from 12% to 0-5% for several items. The share of processed foods in the MPCE has grown the most in the past decade, driven by rapid urbanisation, improving purchasing power and a young population. GST has also declined for fast-growing items such as toilet articles and personal beauty services (both from 18% to 5%). 

The consumer durables under the top 30 consumed categories enjoying GST relief are cars, two-wheelers and TVs. The GST is lower across all categories of cars. The tax rate for entry-level small cars has been lowered from 29% to 18% even as there was an effective reduction for premium cars (40% from 50%), with the compensation cess being removed. Crisil Intelligence estimates an 8-9% fall in the average prices of entry-level car segments, 3.5% fall in mid-sports utility vehicles (SUVs) and 6.7% fall in premium SUVs13. The two-wheeler GST was lowered to 18% from 28% only for standard two-wheelers, while the GST on premium items was brought down to a standard 18% (from 28%).

The government lowered the GST rate on lower-value footwear, cars, two-wheelers and hotel accommodation. For clothing, it raised the purchase value for availing of 5% GST. This will benefit the middle class more. In contrast, taxes were hiked for premium variants of clothing to 18% from 12%. Tax on premium two-wheelers was hiked to 40% from 31%, even though it was lowered for standard variants. Crisil Intelligence estimates a 7.8% drop in prices of standard two-wheelers, but a 6.9% increase in premium variants.

The items where the GST revision does not provide a direct benefit are already at 0%: raw food items such as cereals, vegetables and spices. These items occupy a significant part of the consumer basket, i.e. 26% of MPCE for rural areas and 19% for urban. Among essential services, rent continues to have 0% GST. For a majority of services, except health and personal beauty services, GST remains unchanged. However, restaurants and mobile usage through mobile tariff charges continue to face 18% GST. Additionally, emerging services such as e-commerce delivery were brought onto the net, taxed now at 18%.