The proposed changes to the goods and services tax (GST) announced on August 15, aimed at reducing taxes on daily-use items, is expected to spur consumer demand for packaged goods, essentials and price-sensitive consumer durables, according to industry executives and analysts.
The move comes at a time when urban demand remains subdued but is showing signs of a slow recovery as macros support buying behaviour. The proposed tax reduction will move 99 per cent of items from the current 12 percent slab to the lower 5 percent bracket. Analysts see items like packaged foods, hair oil and fruit juices poised to become more affordable under the 5 percent rate. Consumer durables like air conditioners, televisions and mobiles will also be cheaper once the measures are approved, moving them from the current 28 percent tax slab to 18 percent slab.
"Currently ACs are taxed at 28 percent and other appliances such as refrigerators, washing machines, microwaves already have 18 percent GST. With rising temperatures, cooling appliances like air conditioners are no more luxury and have become a necessity. GST reduction from 28 percent to 18 percent on ACs can help to make it more affordable to masses and improve the quality of life for many Indians," said Kamal Nandi, business head and executive vice president at appliances business, Godrej Enterprises Group.
The GST is structured in a 5/12/18/28 tax slab formation. The government has now proposed that most goods be subsumed in the 5 percent and 18 percent. The changes do not accommodate 'sin goods' and luxury items, for which a tax slab of 40 percent is being proposed.
"The proposed reforms have two benefits. One is that essentials and FMCG products will see quicker volume traction, while consumer durables, which are highly price-sensitive, will gain renewed affordability," said an analyst at a leading domestic brokerage.
Almost 99 percent of the goods currently in the 12 percent slab (standard goods) are expected to be transitioned to the 5 percent slab, which should lower retail prices by 4-5 percent, aiding household budgets, brokerage Motilal Oswal said in a note on August 18. Key segments/sectors that stand to benefit include consumer staples (through better demand) and consumer durables (mainly room air conditioners), according to the brokerage.
"By reducing the number of slabs and moving many categories including daily essentials, packaged foods and durables into lower tax brackets, the government is effectively creating room for higher disposable incomes at the household level. Importantly, the simplification of slabs will also ease compliance costs across the value chain, allowing manufacturers and retailers to optimise pricing more transparently," the analyst added.
"For companies, particularly in consumer durables and appliances, this could unlock latent demand in Tier-2 and Tier-3 cities where tax incidence has been a barrier. Overall, the move is not just about lower prices, but about sustaining a healthier demand cycle that could support broader economic growth over the medium term," the analyst said.
That spells good news for user-facing companies. On its part, Godrej Consumer Products sees it as an opportunity to drive demand for its higher-priced portfolio with the move expected to unlock demand across consumer segments.
"In urban centres, we could see consumers upgrading more easily to premium formats as affordability improves. In rural areas, companies would look to pass more value to their customers through lower price points or higher volume for the relevant categories. This could accelerate trials and category adoption, thereby improving volume growth for the FMCG sector," said Krishna Khatwani, head of sales (India), Godrej Consumer Products.
E-commerce players too welcomed the move calling it ' progressive step'.
"We are optimistic that this policy direction will contribute positively to consumer sentiment and help retailers and sellers plan effectively for the season," said Rajneesh Kumar, Chief Corporate Affairs Officer, Flipkart Group.
However, MS Mani, partner, Deloitte India, sounded a note of caution. The absence of anti-profiteering provisions as things stand would make it incumbent for businesses to self regulate and pass on the reductions to the consumers, he pointed out.
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