GST rate rationalization-a big boost for consumption driven sectors

India’s long-awaited GST 2.0 reform has arrived with clarity and conviction, marking a pivotal shift in the country’s indirect tax landscape. Far from being just a rate-cut exercise, GST 2.0 signals a deeper structural transformation aimed at enhancing transparency, formalisation, and consumption-led growth. The absence of negative surprises in the announcement reaffirms that policymakers are maintaining a clear focus on reviving demand and easing household financial burdens.

The sheer scale of the reform has decisively ended uncertainty around the government’s stance, with the breadth and depth of rate cuts not only meeting, but in many cases, exceeding expectations. Notably, reductions on essential goods came as a clear positive surprise, with the total consumer benefit estimated at around $20 billion-poised to inject fresh momentum into the economy. The introduction of a simplified two-slab structure-5% for essentials and 18% for most other goods and services-replaces the earlier four-tier system, while a distinct 40% rate has been earmarked for luxury and sin goods. This streamlining is expected to make the tax regime more equitable and predictable.

Market observers and policy experts view this transition as a stepping stone toward a single standard GST rate-a model adopted by several mature economies. A unified rate would eliminate classification disputes, reduce compliance burdens, and enhance transparency. With over 70% of GST collections already coming from the 18% slab, a single rate is seen as fiscally viable without significantly impacting revenue. Additionally, simplification is expected to boost formalisation, especially among MSMEs, by lowering entry barriers and reducing the incentive to operate in the informal sector. Revenue buoyancy-the responsiveness of tax revenue to economic growth-has already improved post-GST, rising from 0.72 to 1.22 for states, and a unified rate could further enhance this by broadening the tax base and reducing leakages. With monthly GST collections averaging ₹1.8 lakh crore and a tax base exceeding 1.5 crore entities, India is well-positioned to eventually converge toward a unified rate, fulfilling the long-standing vision of “One Nation, One Tax”.

Key insights from the reforms:

• Simplified GST structure: Council introduces a “Simple Tax” with two main rates - 18% (standard) and 5% (merit), plus 40% for demerit goods, easing compliance and benefiting citizens and businesses.
• Insurance relief: GST fully exempted on life and health insurance policies (including reinsurance), making coverage more affordable for individuals, families, and senior citizens.
• Healthcare & essentials: GST on lifesaving drugs, medicines, medical devices, and supplies slashed to 0-5%, lowering treatment costs and expanding access to critical healthcare.
• Everyday goods cheaper: Major rate cuts on common household items, consumer appliances, packaged foods, toiletries, bicycles, and personal care products - easing inflation pressure on consumers.
• Boost to sectors: Agriculture, MSMEs, textiles, fertilizers, renewables, transport, and labour-intensive industries see rate reductions and inverted duty correction, spurring growth, jobs, and investment. Mass mobility vehicles like smaller cars and motorcycles up to 350cc see reduced GST rates, dropping from 28% to 18%. Higher end autos have not seen cess imposition, which is a huge positive.
• GDP & Inflation impact: GST related demand boost is expected to add 100 to 120 bps to the GDP growth over next 4-6 quarters, thereby nullifying the negative impact of higher tariffs on exports to US. Staples, auto, consumer durables are likely to drive the gains. 30bps downside to CPI inflation at headline level at current basket composition is also expected. The impact will be amplified once the CPI basket changes and becomes more representable to current consumption habits.
• Net revenue loss at 7bps of FY26E GDP for Centre: The total revenue loss of INR 477 bn (13 bps of FY26E GDP) is in line with the INR 500-600 bn estimated*. This shall be shared by both centre and states. The final loss is subject to buoyancy gains.
• Significant push for manufacturing: The rate rationalisation aims to correct the inverted duty structure that exists in key sectors such as textiles.
• Fillip to consumption: The tax rebate that came into effect this year, amid lower inflation, rate cuts along with GST cuts are likely to be positive for consumption in the economy. The impending Pay Commission awards will add further fillip.

Please see the below table for change in GST rates for key products:

Impact on our portfolios:

The table below outlines our exposure to the industries impacted by the recent GST reduction. Our house view is that this cut reflects a long-term strategy aimed at enhancing affordability and stimulating consumption. It aligns with other recent measures-such as income tax reductions and the curtailment of non-productive or loss-making financial activities-that collectively increase disposable income and support broader economic growth.

The sectors poised to benefit include consumption (both staples and discretionary items such as daily-use goods, automobiles, consumer durables, and stationery) as well as cement. We have maintained an overweight/positive stance on these sectors, and this development further reinforces our growth outlook.

Source: PGIM India Internal Analysis. Data as of July 2025. 

¹Inverted duty structure refers to a situation in taxation where the tax rate on inputs (raw materials or services used in production) is higher than the tax rate on the final output (finished goods or services). One of the goals of GST 2.0 is to minimize or eliminate inverted duty structures by rationalizing rates, which helps streamline tax credits and improve ease of doing business.

  ²Source: Elara securities.

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