From soap makers to car manufacturers, consumer companies have been battling with sluggish demand over the last few quarters, particularly in urban markets.
This week, they received an early Diwali gift with the GST Council approving a complete revamp of the Goods and Services Tax: a move that will see GST rates on many daily-use essentials (and on products like cars, ACs, and refrigerators) come down, which will boost sales.
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Companies are also keen to pass on GST cuts completely, in order to push consumers to buy more. Over time, CPI (consumer price index) inflation is also expected to come off on an annual basis.
From September 22, most essential FMCG items will have a GST rate of 5 per cent from the earlier rate of 12-18 per cent. Even small cars (sub-4 metre and up to 1200cc petrol or 1500cc diesel) will also be taxed at a lower 18 per cent, from the previous 28 per cent.
While bigger cars, mid-size SUVs, and bikes above 350cc face a much higher GST of 40 per cent, they too stand to benefit, considering that earlier they were subject to a 28 per cent GST in addition to a cess—which raised the total tax incidence to nearly 50 per cent.
Festival season demand
The GST cuts come amid lacklustre consumer demand. Companies now hope that a swift and complete transmission of the GST rates will lead to a strong festive season demand.
Carmaker Renault has said it will pass on the GST benefits across its entire product portfolio. Customers can start booking Renault cars at the new prices immediately with deliveries made on or after September 22. The GST cuts will see prices reduced by up to Rs 96,395 (for Renault’s products).
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“We believe the timely initiative will not only make our cars more accessible but also energise demand during the festive season,” said Venkatram Mamillapalle, MD of Renault India.
Other carmakers like Tata Motors too have taken similar steps, urging customers to book vehicles early for festive period deliveries at the lower GST rates, with demand expected to surge. Tata’s passenger vehicles will see reduction between Rs 75,000 and Rs 1.45 lakhs, post the GST cuts.
Mahindra and Mahindra’s utility vehicles will also see full GST benefits ranging from Rs 1.01 lakhs to Rs 1.43 lakhs, starting September 6.
“This is a decisive step that will boost affordability, spur demand and make India’s mobility ecosystem stronger and more inclusive. As the country heads into the peak festive season, glitch-free implementation will be the key to ensuring that the benefits seamlessly reach customers,” said C.S. Vigneshwar, the president of the Federation of Auto Dealers Association (FADA).
FMCG companies have also said that they would ensure that the GST rate reduction benefits are passed on to consumers.
“This (government initiative to lower taxes) is a positive trigger for demand and a strong driver of volume growth,” said Aasif Malbari, chief financial officer at Godrej Consumer Products.
R.G. Chandramogan, the chairman of Hatsun Agro Product, said that the GST reduction would further India’s progress from being an importer of dairy and value-added foods to becoming a global exporter.
Footwear major Bata said it would offer customers across India immediate access to GST savings through instant discounts.
“By absorbing GST on select footwear, we are ensuring that festive shopping starts early, and is more affordable,” said Gunjan Shah, MD and CEO of Bata India.
The GST cuts are expected to drive consumption up, starting with the crucial festive season—and in turn giving the GDP a boost. At the same time, it will also bring down inflation.
India’s CPI inflation hit an 8-year low of 1.55 per cent in July, aided by a significant drop in food inflation.
As per the Reserve Bank of India’s projections made in the last monetary policy committee meeting, CPI inflation was likely to edge up to over 4 per cent by the January-March quarter.
It sees full-year (2025-26) inflation at 3.1 per cent, with it touching 4.4 per cent by the fourth quarter, and further rising to 4.9 per cent in the April-June quarter of the next year.
GST reforms and annual inflation
The GST cuts will have a meaningful downward bearing on annual inflation.
“The tax rate cuts can lower headline CPI inflation by about 1 percentage point if producers pass on all benefits to consumers. If the pass-through is only partial, the inflation fall could be closer to 0.5 per cent,” said Pranjul Bhandari, chief economist, India and Indonesia, at HSBC.
Anubhuti Sahay, head of India economic research at Standard Chartered Bank feels the GST cut could lower inflation by 40-60 bps on an annual basis.
Based on its analysis, Sahay pointed out that selected items with a weight of 5.3 per cent in the CPI basket (like bakery products and personal care products) have seen a sharp GST reduction to 5 per cent (from 18 per cent).
“As most of the GST cut is applicable to consumer non-durables, which have a higher weight in CPI, the impact on headline inflation could be as large as 60-65 bps on an annual basis. However, if we assume a partial pass-through of these tax reductions to consumers, the impact on FY2026 headline CPI inflation could be in the range of 20-25 bps, given that it is effective from the middle of the year, with the remainder likely to be felt in FY2027,” said Sahay.
Standard Chartered currently expects inflation this year to trend at 2.9 per cent, and while the GST cuts pose a downside risk, it has still maintained its forecast for now, as food prices can be volatile.