This is the message that the ruling regime has sent to the citizens. Prime Minister Narendra Modi promised a double-Diwali bonanza. The new rates, applicable from September 22, the first day of the auspicious Navratri, will thrill the people during the forthcoming festive season. Several sectors will benefit from the two-slab structure, with hundreds of items dipping into lower-rate brackets. “The five per cent ‘merit’ rate now covers a wide range of essentials. Everyday items like hair oil, shampoos, soaps, toothpaste, bicycles and kitchenware will see their tax burden fall sharply, translating into lower prices,” says Narendra Singh, founder, Growth Investing.
It is surprising that despite coal being shifted to a higher slab, from five per cent to 18 per cent, it helps the coal users, especially private businesses with captive mines. As a Government official explains, “The move is revenue neutral. Coal earlier attracted a lower GST, but had an accompanying compensation cess of `400 a tonne to help the States, which lost out on revenues. Firms were not allowed refunds of the cess under the input tax credit. Now, the cess is gone. The higher GST of 18 per cent comes to the same outgo. In addition, the entire amount paid by users, including captive mine owners, who use the coal to make manufactured products, can claim refunds.”
Insurance gains the most. “The decision to exempt the premiums of life and health insurance marks a pivotal shift. It will reshape the insurance landscape, accelerating penetration, driving higher renewal rates, building deeper customer loyalty and a critical catalyst for growth,” feels Anand Roy of Star Health and Allied Insurance. “The exemption marks a new precedent, reshaping not just economics, but the very inclusivity of protection. It brings us closer to a culture where proactive wellness and financial resilience become a shared standard, not a privileged exception,” adds Yogesh Agarwal, founder and CEO, Onsurity. “It encourages individuals to seek coverage,” says Rakesh Jain, CEO, Reliance General Insurance.
Consumer electronics is another sector that gets a boost. “The cut from 28 per cent to 18 per cent is a progressive reform as it will make electronic items like TVs, ACs and other appliances more affordable for millions. It enables consumers to save `3,000-5,000 on major appliances, and encourages them to fulfill their needs,” says Anurag Sharma, MD and CEO, AKAI India. This is true of real estate. “The slashing of GST on cement will play a critical role in rehauling cost structures,” says Vimal Nadar, senior director, Colliers India. “With the reduction in costs of construction materials, input expenses are expected to ease,” adds Piyush Bothra, CFO, Square Yards.
A similar logic goes for the auto and two-wheeler segment. “The reduction on two-wheelers up to 350 cc will make them affordable and accessible. It will boost demand in the entry-level and mid-segment categories, which form a large part of India’s market. Two-wheeler is a lifeline for Bharat,” says Aalesh Avlani, co-founder, Credit Wise Capital. The auto industry, which was grappling with moderate sales, and high inventory, can hope to take a breather. The next few months will determine whether its fortunes change or not. But items and products shifting into lower slabs is a boon for many.
The only snag is whether the beneficiary sectors will pass on the benefits to the consumers. Some rumblings have begun. Within insurance, some of the insurers are unsure if they will do it. One of them explains, “There is little clarity on the input tax credit for the sector. When the final notification comes in a few days, we will know if we can claim refunds on GST paid on inputs. If not, the ability to pass on the benefit of lower GST on premiums will be lower.” Similar echoes are emanating from the auto segment. Large players believe that they have suffered from lower sales in the past, and their profits were dented. Hence, they will possibly not pass on the benefits.
Over the next few weeks, there will be a lot of politics on who will agree to pass on the benefits, and who will not. Over the next few months, the passed-on benefits may be slowly withdrawn by some sectors. Over a year or so, prices of some products may go up despite lower GST rates. Expect a lot of activity in the future.
There is a certain fixation among the policy-makers about the dual GST rate. It does not merely signify a simplification and removal of confusion. It indicates a subconscious, deep-rooted desire to create other dual structures in taxation. It is between companies and individuals. As an article in this newspaper argued, employers or companies pay lower taxes (in terms of values) compared to employees or individuals. Collections from personal income tax have topped those from corporate taxes. This is one dual structure that is accentuated by the new GST rates. Since GST is a consumption tax paid by buyers or individuals, they bear the burden, not the sellers and makers, who pass on the benefits and weights.
The second duality is between the lower classes and middle class. The sin tax of 40 per cent in the new structure defines this. Most of the items, which are consumed by the middle-middle and upper-middle classes are now deemed sinful. Thus, if you buy higher-priced non-economy flight tickets, you pay higher GST than the ‘economy’ counterparts. Business and premium classes are preferred by the well-to-do, and the economy class is for aam admi. If you wish to buy a bigger car, please pay higher GST, for you have sinned. Not only are you a petrol guzzler, you cause harm to the climate. So, well, pay for it, do not question us, and ride on to your destinations.
Although one is not sure how it will play out, and we will need to wait for the notifications, it seems that restaurants will not be able to claim refunds on input tax credit for whatever they buy, and on which GST is included. This was a long-standing demand, and the Government has refused to listen to the pleas. Of course, if you eat out, and wish to opt for fine-dining, pay more. Similarly, only hotel rooms with a tariff of below `7,500 will attract five per cent. The more expensive hotels will pay more. If you prefer convenience, comfort and opulence, take out more from your purse.
The flip side is that the so-called sin tax will impact tens of thousands of poor and low classes. This is because many items, which are consumed by most segments of the society are dubbed as sinful goods. Take cigarettes, for example, which are consumed across classes and castes. Or lotteries, which are brought by anyone and everyone, but mostly by the lower classes. Kerala, which accounts for 97 per cent of the country’s lottery business, according to one estimate, had pleaded that it should not be included under the 40 per cent bracket. But the Government, which recently banned money-based online gaming, and seems to have adopted an aggressive stance against betting, speculation and gambling, refused.
What is more relevant is that the sin tax may act against the growing aspirations of the Indians. Several middle-class families, who may be ok with petrol cars below 1,200 cc, which attract lower GST, aspire to own a bigger car. They are willing to opt for loans, and pay EMIs, even if they hurt their budgets, only because they wish to be seen as having arrived in the society. Thanks to mass media and social media, the aspiration-driven middle class hopes to ape the rich, and buy assets that reflect a higher class and lifestyle. This explains why they cringe and save, only to take an annual foreign vacation, even if it means going to Bangkok, or a nearby Asian country.
Several middle-class families may not afford hotels and resorts, where the room tariffs are over `7,500 a day. But then they deliberately seek them on at least one vacation a year. Not just to show off, which may be a reason, but to enjoy the same comforts as the rich-and-happening. The rich can do it every day. They can hop on to a private plane, or sail on a cruise boat anytime they wish to. However, the middle class can do it at least once a year, and may not be on such a grand scale. It is about aspirations, which help people to break out of realities, and see themselves at a higher level. It is about hopes and dreams that their lives too can improve and scale up.
When we talked about the higher GST on coal earlier, we referred to the phrase, revenue neutral. If one looks at GST 2.0 in its entirety, the one striking feature that no has analysed or talked about, is the near-revenue neutrality of the changes. Before they were announced, experts felt that the Government revenues will take a hit by `80,000 crore or `1,00,000 crore. When the revenue secretary declared the figure, it was a non-threatening `48,000 crore. It implies two things. First, somehow the calculating and math-driven officials ensured revenue neutrality. They made up for the losses due to products shifting into lower rates by those that remained at the same levels, or shifted into higher rate slabs.
Second, if the entire exercise, which was touted as huge reforms in GST, results in meagre revenue losses, what was the hoopla about? Yes, hundreds of items will attract lower GST, and may become cheaper. But then it also implies that many items, which contribute huge GST collections, will become more expensive. This is where the sin tax is crucial. We will need to wait for the items that are listed in the bracket when the notification comes out in a few days. Surely, there will be several surprises, and one may see the Government pulling out an unbelievable number of rabbits out of its GST hat. There may be a few shocks too for some segments and companies.
“There is a suspicion among experts that whichever products that do not find themselves in either the zero per cent, five per cent and 18 per cent brackets will be clubbed in the 40 per cent one. It will have the residuary effect, which is likely to boost collections from the sin tax to mostly compensate for the losses from the other brackets. The fact remains that many products have moved from the earlier 28 per cent to 40 per cent,” explains Arun Goyal, who is a consultant on tariffs, and whose firm brings out regular books on the subject. If what he says is true, there will be a huge hue and cry in a few days, when people read the fine print in the notification.
Yet another reason why the Government revenues have not been hurt more is because of the services sector. It contributes the highest to the GDP, and most of its segments are still in the higher 18 per cent brackets. Compared to the manufactured products, where the rates are down, services remain in the upper bracket. This is where the Government will earn most of its revenues, since services account for more than half of the country’s GDP. This is a problem area, as policy-makers across the world somehow focus on manufacturing and agriculture but shun or neglect services. One is not sure whether this is deliberate or by design. Maybe the electoral equations are in favour of the primary and secondary sectors. Maybe those involved in services make less noise, and create minimal controversies.
Finally, let us consider the loss figure. As this newspaper has argued in earlier articles, the amount is measly when compared to annual GST collections. On a gross basis, `48,000 crore is a quarter of average monthly collections, or what is earned in a week. On a net basis, it may amount to 2-3 weeks of collections. This implies that even if volumes bump up a little, the Government will make up for the loss. What is more likely to happen is that the collections from the sin tax will increase to compensate the Government. If both happen, you may see higher collections in the future despite the excitement of GST cuts across segments and sectors.
The problem stems from the fact that if the Government wishes to genuinely overhaul the GST regime, mere tweaks here and there, as it has done in the past, will not work. Even an honest effort, like the present one, which reduces the slabs to two, and pushes most products into lower ones, is not enough. What is needed is a complete rethink of what we wish GST to achieve. Unless we keep revenues out of the picture, and out of the equation, we will not achieve progressive reforms. Progress comes when we get rid of a bureaucratic mindset, and let the market mechanisms work, but with adequate and strict monitoring and regulation.