Do it yourself

In his Independence Day speech, the prime minister announced that his government has proposed comprehensive reforms to the extant Goods and Services Tax (GST) structure. The proposals have been reportedly sent to the Group of Ministers (GoM). Two Groups of Ministers (comprising representatives of the State governments) — one on rate rationalization and another on compensation cess — will have to approve the proposals before they go to the GST Council for approval. The central government is quite confident that the GST Council members shall approve the proposals promptly, and it could be implemented before the forthcoming festival season. The stated objectives of the proposed GST reforms, focus on simplifying the tax system, reducing the tax burden, and promoting economic growth.

Based on the publicly available information, the key highlights of the proposed GST reforms are as follows:

Structural Reforms

Correct inverted duty structures to align input and output tax rates, reduce input tax credit accumulation and support domestic value addition.

Resolve classification disputes by streamlining rate structures to minimize disputes, simplify compliance, and ensure equity and consistency across sectors.

Provide long-term clarity on rates and policy direction to enhance industry confidence and support better business planning.

Rate Rationalization

Simplify the GST structure by reducing the current four slabs (5%, 12%, 18%, 28%) to a two-slab system (5% and 18%), with a special 40% rate for luxury and sin goods like tobacco and online gaming.

Lower taxes on essential and aspirational goods (e.g., refrigerators, air conditioners, packaged food, medical items) to enhance affordability, boost consumption, and make these goods more accessible, particularly for the common man, middle class, women, students, and farmers.

Maintain current tax incidence on sin goods (e.g., tobacco at 88%) by subsuming compensation cess into a uniform 40% rate after its expiration.

Ease of Living

Simplify compliance processes, particularly for small businesses and startups, through seamless, technology-driven, and time-bound registration.

Introduce pre-filled returns to reduce manual intervention and mismatches.

Ensure faster, automated refund processes for exporters and those affected by inverted duty structures to cut delays and build trust in the system.

Markets welcome the proposals

The Indian equity markets reacted to the proposal with enthusiasm. Despite lingering uncertainties over implementation of penal tariffs from 27^th August 2025, benchmark indices gained ~1.5%. The sectors expected to be directly benefiting from the lower incidence of GST, e.g., automobile, white goods, FMCG, insurance, cement, retail trade etc. witnessed strong buying. After almost seven weeks of sideways to weak market movement, it was a pleasant scene to witness.

In my view, the proposed GST reforms, in conjunction with the lower incidence of income-tax, expected pay commission benefits from the current fiscal year, good monsoon leading to improved rural income, stable prices, lower rates and adequate liquidity in the system shall support the Indian equity markets, especially the consumption (also see here), a sector which has been struggling for some time. Nonetheless, it would be in order to exercise some caution and not get overexcited by the GST proposals.

In particular, the traders might want to suitably factor in the following considerations in their expectations:

·         GST restructuring may be overall revenue neutral, implying that net impact of the GST rate rationalization may not be significant. For example, some 5% items can go to a higher slab of18% and some 28% items may go to 40%. Besides, the compensation cess that was to end by March 2026, may get subsumed in the 40% rate for many items and become permanent.

·         In the past few years passenger vehicles with higher engine capacity (SUVs and large cars) have witnessed the highest growth rate. The effective GST rates on these vehicles may not come down (or even go higher).

·         The prime minister has repeatedly mentioned the urgency to control obesity. Several consumption items (e.g., aerated beverages, confectionary, fried snacks, sweets etc.) are popularly believed to be contributing to the rise of obesity amongst common people, especially youth. These goods could potentially get classified as “sin" items and qualify for the highest tax rate.

·         To neutralize the fiscal impact of lower GST collection, the government may choose to cut subsidies on food and EV/solar. The pay commission award might also be rationalized to factor in the benefits of lower income tax, GST and inflation; resulting in lower rise in income than presently estimated.

·         Some of the lower GST benefits may be used to set-off losses on account of higher US tariff (for businesses which are not 100% export oriented) and not passed on to the consumers.

·         A major destocking exercise could happen before new GST rates come into effect. Buyers of discretionary items like cars and white goods may postpone buying till lower GST rates come into effect. 2QFY26 results may be impacted by lower sales and destocking. Though, Nov Dec may see accelerated demand and overall FY26 impact may be positive.

·         Petroleum products and alcohol continue to stay out of the GST ambit.

·         Not likely (but also not improbable), but the GST Council may not immediately approve the proposed changes in the GST rate structure, delaying the implementation. It will disappoint the traders and cause heightened volatility in the markets.