MUMBAI: While the revised GST tax rates will benefit 11 of the top 30 consumption items—covering about a third of an average consumer’s monthly expenditure—the actual impact of these lower tax rates will depend on how much of the benefit is passed on to consumers, and whether this move will indeed spur increased consumption.
These 11 items include essentials such as milk products, discretionary goods like automobiles and beauty services, and high-demand items such as processed food, according to a report by Crisil Ratings. The report comes just days ahead of the new indirect tax rates coming into effect on Monday.
Crisil analysts noted that the lower taxes will especially benefit the middle class, which has better purchasing power. Tax cuts on essentials should improve affordability, particularly for low- to middle-income segments. Moreover, in some categories, the GST rate cuts apply only to lower-value items such as clothing, footwear, and two-wheelers. This move complements the income-tax relief announced in the budget for this segment and is expected to support demand.
However, the final impact on consumption will hinge on the extent to which producers pass on the benefits of rate cuts to consumers. Crisil highlighted global evidence showing that the passthrough of tax changes varies widely across countries and can take time to materialize.
“We expect the impact of GST rate cuts on consumption to play out over this fiscal and the next,” the report said.
Notably, this July marked eight years since the adoption of GST.
The recent rate revisions have lowered the peak GST rate from 48% to 40% for luxury and sin goods, and from 28% to 18% for most other items. The 12% and 28% slabs have been eliminated, while the 5% slab has been retained. These changes are expected to deliver two major benefits: a simplified rate structure that eases compliance and promotes formalisation, and an impetus to consumption due to lower prices of mass consumption items.
Regarding the impact on the top 30 consumption items—which account for 88% of total spending—the Crisil report noted that the size of the "bubble" (in their analysis) indicates each item's share in urban monthly expenditure.
Under the new regime, most items fall below the 28% rate, with some discretionary goods at 18% and essential goods at 0% or 5%.
Rough estimates suggest that the simple average GST rate across these top 30 consumption items falls from 11% to 9%, while the consumption-weighted average GST rate is even lower, as a significant share of spending is on food and related items taxed at either 0% or 5%.
Governments around the world occasionally revise consumption-related taxes or VAT rates. Many have implemented temporary, recession-driven VAT cuts to boost demand—such as France during the 2008 financial crisis and Germany during the Covid-19 pandemic. In contrast, Japan has increased consumption taxes to support government revenue.
The effectiveness of such revisions depends largely on the extent of passthrough to consumers. Global examples show a passthrough range of 25% to 100%. For instance, France's 2008 VAT cut had a limited effect on consumption because producers retained much of the benefit. This illustrates that passthroughs often do not happen immediately and can take at least three months.
Lower consumption taxes are expected to result in a one-off reduction in retail prices. However, the scale and timing of the decline will depend—just like the impact on consumption—on how quickly and fully producers transmit these benefits.
Crisil’s analysis also shows that over 20% of the Consumer Price Inflation (CPI) basket is subject to GST rate cuts, while only 1.2% faces rate increases—mainly due to the negligible share of demerit goods in the average consumer’s basket. Significantly, nearly 47% of the CPI basket now falls under the nil GST rate, up from 35.3% previously. For items with multiple GST rates, the analysis assumes the standard rate applies. Fuel, alcohol, and electricity continue to remain outside the GST regime.
