GST Rate Rationalization - what it could mean for business margins

A lower GST outgo shall reduce the upfront cash outflow towards the tax liability.

By Rahul Khurana and Saurabh Dugar

The decision of GST rate rationalization taken in the 56th GST Council meeting is a milestone in the indirect tax reforms process, involving the introduction of GST regime in 2017. At the heart of this decision appears to be an intent to provide relief to the common people and boost consumption.

At first blush, it is largely expected that the rate reduction would inherently translate into reduction in prices and serve as a catalyst for demand growth and margin improvement. The reduction in prices on account of taxes, to an extent should lessen the burden on businesses for the upcoming festive seasons, which earlier would have extended higher discounts and incentives to re-sellers and retailers. The businesses can preserve margins that would have been otherwise eroded by festive ‘Diwali Dhamaka’ schemes.

Further, under GST by its design, the rate reduction will percolate through the entire value chain, and a lower GST outgo shall reduce the upfront cash outflow towards the tax liability. This would improve working capital efficiency, and reduce reliance on working capital borrowings, thereby lowering interest costs.

Additionally, the reduction in GST on cement from 28% to 18% which is a key input for construction activities can potentially lower construction costs for businesses. Since Input Tax Credit (‘ITC’) on inward supplies used in civil structures is not available, this directly reduces capital outlay on new factories, warehouses, et cetera, enabling more cost-efficient expansion and improving long-term returns.

It is important to mention that businesses should not be swayed in increasing the prices (and margins) of their supplies to offset the tax reduction. Even though the legal enforcement of anti-profiteering provision under GST has been discontinued from 1st April 2025, it is expected that the benefits arising out of tax reduction should reach the end consumer, as observed by the Delhi High Court in Reckitt Benckiser India Pvt. Ltd. v. Union of India & Ors.[2024: DHC:609-DB].

In absence of a legal mandate or guidelines to ensure passing of such benefits, few questions still need to be addressed. For instance, whether businesses can improve their margins by cross-subsidization across different SKUs interchangeably, i.e. safeguarding consumer interest in price-sensitive goods and enhancing profit margins in premium categories? How a commensurate reduction in MRP can be ensured on low-priced packaged commodities where a reduction leads to a revised MRP being denominated in fraction of a rupee, without impacting sales through cash transactions?

The recent structuring in GST rates primarily benefits goods, while most services largely continue to be taxed at 18%. This disparity may cause further accumulation of ITC on service procurements, for businesses dealing in goods taxed at 5%, thus affecting cash-flow.

Another impact on the margins arises out of the fact that the reduction in GST rates has been proposed w.e.f 22nd September 2025. This practice is in divergence with the general norm followed in Union Budgets to effectuate changes in indirect tax rates immediately from midnight. Postponement of the revision to a future date may lead to customers delaying their orders, thereby impacting cash flow for businesses in the short-term.

Besides the lowering of tax rates, GST on many goods and services (for example pencils, notebooks, individual health and life insurance policies etc.) have been proposed to be fully exempted (Nil) from the payment of GST.

Where the output GST is Nil, the credit of tax paid on inputs is denied. Hence it is contemplated that full reduction in GST cannot be passed on by way of price reduction, as the ITC denied is a cost for the business which may have to be passed on to the consumer. In such situations of supplies being exempted from GST or facing an inverted duty structure business must head back to the drawing board to re-determine the margins and look for any avenues for tax optimization.

Before parting, it begs a mention that the theme of GST 2.0 seems to be one of reduction in rates, but the same is not universal. The oil and gas sector seems to have taken big hit wherein the GST rate on services in relation to petroleum operations has increased from 12% to 18%, which in turn adversely affects the margins of the Operators. This is all the more so, because oil and gas prices are determined by international market rates, leaving no scope for an Operator to increase the sale price, and pass on the tax burden to the customer.

Be that as it may, the reform-momentum should continue and maybe the stage is now set to address next series of issues, including but not limited to inclusion of petroleum products, electricity under GST, pruning the blocked credit list, rationalizing interest rate on delayed tax payments.

(Rahul Khurana is Partner and Saurabh Dugar, Associate Partner, at Economic Laws Practice.)

Views are personal and do not represent the stand of this publication.