The "big bang" GST 2.0 reforms have officially come into effect from today, ushering in a wave of mega discounts and price reductions just in time for the festive season. Retailers, auto companies, textile chains, and FMCG businesses are all lining up to cash in on the rate cuts, with the government instructing them to display new prices to ensure transparency for consumers.
The GST revision has taken most items below the 28% mark, with some discretionary items at 18% and essentials at 0 or 5%.
The automobile sector is at the forefront of this shift, with a price war intensifying among carmakers. Carmakers have announced sharp price cuts ranging from few thousands to few lakhs. Maruti Suzuki, the leading car manufacturer in India, announcement of a price reduction of up to 24%. Tata Motors have announced prices cuts up to Rs 1.5 lakh on different models. Leading SUV manufacturer Mahindra & Mahindra has revised the ex-showroom prices of its internal combustion engine (ICE) vehicles and is offering additional benefits of up to ₹1.29 lakhs.
According to experts, these steep markdowns are driven by the elimination of the cess component, which was previously as high as 20% for large SUVs. The GST Council has reduced levies on small cars and mass-market motorcycles (below 350cc) from 28% to 18%. While premium SUVs now attract a 40% GST, a reduction from the previous 48% (GST plus cess).
Beyond automobiles, the rate cuts are set to impact a third of an average consumer's monthly expenditure. Fast-moving consumer goods (FMCG) and apparel companies are implementing new strategies to pass on the benefits of recent GST rate cuts to consumers. This includes offering discounts and promotional schemes to clear existing inventory and align with the new tax regime.
FMCG companies are using proactive pricing and promotions, such as offering extra quantities at current prices, to ensure a smooth transition. Retailers and e-commerce platforms have launched festive season sales earlier than usual, with some offering discounts of up to 50% or even 80% on leading brands.
The GST rate for apparel priced up to ₹2,500 has been reduced to 5%, while items above that threshold are now taxed at 18% (up from the previous 12%). This rationalization is expected to boost consumption, especially for value and mid-range retailers.
A report from Crisil Ratings notes that 11 of the top 30 consumption items, including essentials like milk products and processed food, and discretionary items like beauty services, will benefit from the tax cuts. This is expected to boost the purchasing power of the middle and low-middle income segments.
However, the real impact on consumption will depend on the extent to which producers pass on the benefits to consumers. While a simple average GST rate on top consumption items is expected to fall from 11% to 9%, global evidence shows that the pass-through of tax changes can vary significantly and may take some time to fully materialize.
Businesses face the challenge of re-working prices for older inventories, as the new tax rates impact both finished goods and raw materials purchased at higher pre-rationalization rates. To address this, many are rolling out discount schemes to ease the transition and clear stock.