GST rate cut rollout: Will price benefits reach consumers fully?

A Mint analysis of rate cut announcements made by the government shows that the maximum number of products (309) will now be in the 5% tax slab. The government also introduced a 40% tax rate on 18 items, while scrapping cess on many products. According to the old rates, the largest number of products fell into the 12% category. Overall, the impact of the cuts is expected to be positive, with economists anticipating a decrease in inflation of up to 1 percentage point over the next year.

The price benefits, if fully passed on to consumers, however, will be felt differently across consumer groups depending on their consumption patterns. An analysis of old and new GST rates, weighted by the Consumer Price Index (CPI), by IDFC First Bank shows that clothing and footwear and transport and communication groups have likely seen, on average, the biggest decline in rates. The weighted old tax rate on clothing and footwear will come down to 32 basis points to 6.2%, while the transport and communication group, which includes automobiles, will come down by 16 basis points to 8.8%.

The household goods and services, and food and beverages groups will also see lower rates. “Sectors which will see lower tax rates are processed food, medicines, medical equipment, FMGC, consumer durables, small cars, two wheelers, cement," said IDFC First Bank in a note. “In case there is full pass-through of the tax cuts, headline CPI inflation could be lower by 1.0% (over 12 months). The actual impact could be lower at around 0.6-0.8 percentage points, assuming partial passed-through," it added.

Since the announcement of lower rate cuts, auto companies, which saw tax rates on nearly all vehicles decrease significantly, mainly due to the removal of a cess on top of the 28% GST rates, have led the pass-through of the benefits to consumers.

Maruti Suzuki, TVS Motor, Mahindra & Mahindra, Tata Motors, and Hero MotoCorp, among others, have already announced price cuts on various vehicles, including hatchbacks, sedans, and SUVs. Many fast-moving consumer goods (FMCG) companies like Amul, Mother Dairy, Hindustan Unilever, Procter & Gamble, and ITC have also announced price cuts on several goods, such as soaps, shampoos, and some food items.

However, the full pass-through of benefits has remained a concern as media reports pointed to several manufacturers either choosing to cut discounts or increasing grammage, instead of cutting prices, to adjust rate cuts.

Insurance premiums, which went from 12-18% (with input tax credit) to nil (without input tax credit), are unlikely to come down fully. Without the benefit of the input tax credit, the insurers are expected to pass the input tax burden on to the consumer, limiting the extent of the price cuts.

To ensure a smooth transition to new rates, the government, in a notification issued on Thursday, issued provisions that allow “voluntary" use of revised price stickers on goods, along with waiving the requirement for manufacturers and importers to publish revised prices in two newspapers.

The government has clarified that any packaging or wrapper printed with the old maximum retail price (MRP) that was produced before the GST rate revision can continue to be used until 31 March 2026, or until existing stock is exhausted, whichever comes earlier. Companies, however, will be required to ensure that the correct revised MRP is communicated and displayed through stickers, stamping, or online printing at any place on the package, Mint reported on Thursday.