Introduction to GST
The Goods and Services Tax (GST), rolled out in July 2017, marked one of India’s most significant indirect tax reforms. It subsumed multiple central and state levies—excise, service tax, VAT, octroi—into a unified structure designed to simplify taxation, enhance compliance, and boost transparency. Its introduction created a “One Nation, One Tax” framework that reduced cascading taxes and streamlined supply chains across industries. Over the years, GST has evolved through continuous refinements, addressing compliance burdens, clarifying rate structures, and correcting anomalies such as inverted duty structures.
While GST successfully created a unified national market, its four-tier slab structure—5%, 12%, 18%, and 28% plus additional cess on sin goods—was often criticised for complexity. Businesses, especially SMEs and MSMEs, found compliance challenging. Consumers, meanwhile, faced uneven tax burdens across categories. The GST Council, recognising these pain points, has now introduced GST Reform 2.0, a major rationalisation aimed at simplifying the structure, reducing rates, and stimulating demand at a time when consumption growth has been muted.
The Recent Changes – GST 2.0
The 56th GST Council meeting on 3rd September 2025 approved sweeping reforms, reducing four slabs into three—5%, 18%, and 40% (for select luxury and sin goods). The 12% and 28% categories have been scrapped, and several essentials have moved into lower brackets, while a Nil rate applies to specific items to encourage affordability. These reforms will take effect from 22nd September 2025, coinciding with the festive season and expected to provide an immediate consumption boost.
Key sectoral highlights include:
BFSI:
| Product Category | Current Status | Proposed Tax Change | Impact |
| Banks, NBFCs | – | – | Consumption demand beneficiaries mainly include Bajaj Finance, SBI Cards. Positive for Banks and NBFCs, with lower indirect tax burden and lower direct tax rate supporting consumption demand, thereby aiding credit growth. |
| Insurance – Individual Health and Life Insurance | 18% | NIL (Exempted) | SBI Life, LIC, HDFC Life Insurance, ICICI Prudential Life Insurance, Max Life, Star Health, Niva Bupa, NIACL |
Building Materials
| Product Category | Current Status | Proposed Tax Change | Impact |
| Cement | 28% | 18% | All Cement companies (Coverage & Non-Coverage) |
| RMX | 28% | 18% | All Cement companies (Coverage & Non-Coverage) |
Auto
| Product Category | Current Status | Proposed Tax Change | Impact |
| 2W | ICE 2Ws at 28% + cess | 18% for <350cc; 40% for >350cc | Positive for Hero MotoCorp, Bajaj Auto, TVS Motor, Eicher Motors; Negative for pure-play EV OEMs |
| 3W | 28% (ICE) | 18% (ICE) | Bajaj Auto, TVS Motor, M&M |
| 4W | 28% + cess (1% to 22%); luxury vehicles (+40%) | Small cars (<1200cc Petrol & <1500cc Diesel up to 4000mm length): 18%; Hybrid/CNG (<1200cc petrol / <1500cc diesel): 18%; Other PVs (any powertrain, SUVs, luxury cars): 40% | Maruti Suzuki, M&M, Tata Motors, Hyundai |
| CV | 28% (Hydrogen Vehicles 12%) | 18%; Hydrogen fuel cell vehicles 5% | Ashok Leyland, VECV (Eicher), Tata Motors (CV), M&M, SML Izuzu |
| Tractors | Road tractors: 28% / Others: 12% | Road tractors >1800cc: 18%; Other tractors: 5% | Escorts, M&M, VST Tillers & Tractors |
| Ancillary | 18% (most parts), 28% (e.g., tyres, batteries) | New Pneumatic Tyres: 18%; Tractor Tyres/Tubes: 5% | Endurance Tech, Uno Minda, Minda Corp, Sansera Engineering, SSWL, Exide, Amara Raja, Sona BLW, Greaves Cotton, Samvardhana Motherson, Motherson Wiring. 5% GST on EVs unchanged |
Infrastructure & Construction
| Product Category | Current Status | Proposed Tax Change | Impact |
| Infrastructure & Construction | 28% (Cement) | 18% (Cement) | Coverage: GR Infra, HG Infra, PNC Infratech, J Kumar Infraproject, Ahluwalia Contract. Non-coverage: NCC Ltd, Ashoka Buildcon, Afcons Infrastructure |
Consumer Discretionary
| Product Category | Current Status | Proposed Tax Change | Impact |
| Hotels | Up to ₹1000/night – GST Exempt; ₹1001–₹7500/night – 12% (with ITC); Above ₹7500/night – 18% (with ITC) | Up to ₹7500/night – 5% (without ITC); Above ₹7500/night – unchanged at 18% (with ITC) | Positive: Lemon Tree Hotels (~50% of revenue from tariffs <₹7500) |
| QSR | 5% GST on restaurants (no ITC); 18% on restaurants within hotels with tariffs >₹7500/night (with ITC) | Unchanged | Westlife Foodworld, Jubilant Foodworks, Devyani International |
| Footwear & Apparel up to ₹1000 | 5% | 5% | – |
| Footwear & Apparel above ₹1000 | 12% | Up to ₹2500: 5%; Above ₹2500: 18% | Positive for Dmart, Trent, V-Mart |
| Finished Leather (all categories) | 12% | 5% | Significant relief, boosting competitiveness. Positive for Relaxo, Bata India, Metro Brands |
Consumer Durable
| Product Category | Current Status | Proposed Tax Change | Impact |
| Air Conditioners | 28% | 18% | Blue Star, Voltas, Havells |
| Washing Machines, TVs (>32”), Dishwashers | 28% | 18% | Whirlpool, Havells, IFB Industries |
Fertilizers
| Product Category | Current Status | Proposed Tax Change | Impact |
| Key Inputs (Sulphuric Acid, Nitric Acid, Ammonia, etc.) | 12% | 5% | Aarti Industries, Tata Chemicals, GSFC, Hindustan Zinc, Deepak Fertilizers, RCF, NFL |
| Fertilizers (Urea, DAP, Potash, crop protection) | 5% | Unchanged | Benefit from lower input costs, elimination of inverted duty, increased demand. Positive for Dhanuka Agritech, PI Industries, Chambal Fertilisers, GNFC, Coromandel International, RCF, NFL |
Textiles
| Product Category | Current Status | Proposed Tax Change | Impact |
| Various input materials | 12% | 5% | Overall sector |
| Cotton fibre, yarn | 5% | 5% | Overall sector |
| Synthetic yarn | 12% | 5% | Sanathan Textiles |
| Carpets & textile floor coverings | 12% | 5% | Welspun Living |
| Towels, woven fabrics, technical textiles | 12% | 5% | Welspun Living, Raymond, Arvind, Vardhman, Alok, Trident |
| Readymade garments (≤₹1000) | 5% | 5% | NA |
| Readymade garments (₹1000–₹2500) | 12% | 5% | Page Industries, Vedant Fashions, KPR Mill, Arvind, Vardhman |
| Readymade garments (>₹2500) | 12% | 18% | Negative: Vedant Fashions, KPR Mill, Arvind, Vardhman |
Agri Equipment
| Product Category | Current Status | Proposed Tax Change | Impact |
| Irrigation equipment (sprinklers, drip irrigation nozzles, etc.) | 12% | 5% | Jain Irrigation |
| Agricultural machinery (harvesting, soil preparation, etc.) | 12% | 5% | Overall sector |
Power & Ancillaries
| Product Category | Current Status | Proposed Tax Change | Impact |
| Renewable Energy (Bio-Gas, Solar, Wind, Waste-to-Energy, etc.) | 12% | 5% | Positive for Solar, Wind, Hydro. Beneficiaries: Inox Wind, JSW Energy, Suzlon Energy, Waaree Energies, Premier Energies, Vikram Solar |
FMCG
| Product Category | Current Status | Proposed Tax Change | Impact |
| Sauces, Ice Cream, Pasta, Instant Noodles, Vegetables, Chocolate, Coffee, Preserved Meat, Talcum Powder, Hair Oil, Shampoo, Toothpaste | 18% | 5% | Significant tax relief → higher demand volumes. Positive for Nestlé, HUL, ITC, Britannia, Emami, Godrej Consumer, Patanjali, Marico |
| Namkeen, Bhujia, Condensed Milk, Butter, Ghee, Cheese, Dried Fruits, Frozen Vegetables, Nuts | 12% | 5% | Positive for Bikaji, Britannia, ITC |
| Ultra High-Temp Milk, Paneer, Indian Breads | 5% | NIL | Positive for Nestlé and dairy companies |
| Luxury items, Alcohol, Soft Drinks, Fast Food, Sugar & Tobacco | 40% | Unchanged | Neutral for ITC, Godfrey Phillips, VST Industries, DS Group |
| Pencils, Paper Stationery Kits | 12% | 5% | Boost for DOMS, Navneet Education, ITC-Classmate |
| Erasers | 5% | NIL | Positive for DOMS |
| Notebooks & Exercise Books | 12% | NIL | Positive for DOMS |
| Aerated/sweetened waters (colas, soda, energy drinks) | 28% | 40% | Negative for Varun Beverages, Coca-Cola, Parle Agro |
| Other non-alcoholic beverages (juices, sports drinks, iced tea, mocktails) | 18% | 40% | Sharp increase in cost – Negative for premium beverage companies |
On the flip side, sin goods and luxury items—alcohol, cigarettes, sugary drinks, large SUVs, and high-end cars—face a steep 40% tax, replacing earlier cess structures. This ensures revenue neutrality while discouraging harmful consumption.
Collectively, these reforms aim to simplify compliance, reduce prices, widen affordability, and revive demand across multiple sectors, while balancing fiscal considerations.
Sectoral Impacts
1. FMCG & Consumer Staples
The sharp tax cut on everyday essentials such as toothpaste, soaps, hair oils, packaged foods, and dairy products is expected to drive higher volumes. FMCG companies benefit from stronger demand and lower input costs (e.g., packaging materials moved to 5%). Consumers gain through cheaper household goods, particularly benefiting lower- and middle-income households.
2. Automobiles & Auto Ancillaries
Vehicles across segments—2-wheelers, small cars, commercial vehicles—are set to become more affordable. The festive season timing could trigger a demand surge. Ancillary players, including tyre and battery makers, also gain from lower GST. Only premium motorcycles (>350cc) and luxury vehicles face higher taxation at 40%. Overall, the reforms are structurally positive for auto demand.
3. Cement & Building Materials
The reduction from 28% to 18% directly lowers construction costs, particularly benefitting housing and rural construction. Lower GST on fly-ash bricks and slag products also promotes sustainable blended cement.
Although coal rates rose to 18%, the removal of compensation cess by March 2026 should balance costs. This could drive 7–8% demand CAGR for cement over the next five years.
4. Insurance & BFSI
Exempting individual life and health insurance premiums from GST is a game-changer. This enhances affordability, boosts penetration, and supports the long-term “Insurance for All” agenda. Indirectly, higher consumption also benefits banks and NBFCs through stronger credit demand.
5. Healthcare & Pharmaceuticals
Life-saving drugs moving to Nil GST and other medicines to 5% lowers patient costs, making treatments more accessible. Medical devices like thermometers, diagnostic kits, and spectacles also get cheaper, supporting broader healthcare affordability.
6. Consumer Durables & Electronics
Price cuts on ACs, large TVs, dishwashers, and kitchenware are expected to improve affordability and help companies clear excess inventory. Demand could see an uptick, especially during the festive season. This will also aid contract manufacturers and EMS players.
7. Hospitality & QSR
Hotels under ₹7,500/night become cheaper, potentially boosting domestic tourism and occupancy rates. QSR chains benefit from lower GST on inputs like cheese, bakery products, and pizza bread, easing margin pressures.
8. Textiles & Apparel
By extending the 5% GST threshold to garments and footwear priced up to ₹2,500, organised players are better placed to compete with unorganised sellers. Lower GST on textile inputs like yarns, towels, and carpets also cuts production costs.
9. Power & Utilities
Coal GST rose to 18%, but the elimination of the ₹400/tonne compensation cess reduces overall landed cost, easing pressure on utilities like NTPC. The benefit will likely flow to consumers through lower tariffs.
Outlook for Indian Markets
GST 2.0 is not merely a set of rate cuts—it represents a structural shift in India’s policy orientation from a decade of capex-driven growth to a renewed focus on consumption-led expansion. Over the past 4–6 quarters, household demand has been constrained by inflationary pressures and sluggish income growth, making this reform well-timed to revive consumption across segments and accelerate the next leg of economic growth.
The implementation has been strategically phased to align with seasonal demand patterns and fiscal considerations:
- Phase 1 (effective 22 September 2025) marks the most significant change, with revised GST rates applicable across almost all goods and services except tobacco-related products. This includes major rate reductions on everyday FMCG items, small automobiles, consumer durables, agricultural machinery, and key services such as health and life insurance. The timing has been deliberately chosen to coincide with the start of the Navratri festival season, maximising the near-term boost to consumer sentiment and spending.
- Phase 2 (expected post-December 2025) will bring tobacco-related products—including cigarettes, gutkha, pan masala, bidi, zarda and unmanufactured tobacco—under the new 40% GST slab. These items will continue under the current GST + compensation cess regime until all outstanding cess-linked loan and interest obligations are fully discharged. The government aims to conclude this by December 2025, with enabling legislation likely to be introduced during the winter parliamentary session to replace the existing compensation cess framework.
This staggered approach is designed to unlock consumption-led momentum without disrupting fiscal balance. By sustaining higher taxes on luxury and sin goods while easing indirect tax burdens on mass-market essentials, GST 2.0 is expected to:
- Revive discretionary and essential consumption across both rural and urban India, particularly benefiting middle- and lower-income households.
- Support corporate earnings recovery across consumption-linked sectors such as FMCG, automobiles, consumer durables, cement, and hospitality—likely showing up in earnings data from H2FY26.
- Spur a new private capex cycle as stronger demand visibility encourages capacity expansion across manufacturing and services.
- Maintain fiscal stability by sequencing high-yield categories (tobacco and luxury goods) into the new regime after existing liabilities are cleared.
In parallel, institutional readiness is being strengthened. The Goods and Services Tax Network (GSTN) is undergoing a systems overhaul to accommodate the new rate structure and revised refund processes, while the long-pending Goods and Services Tax Appellate Tribunal (GSTAT) is targeted to become operational by December 2025 to streamline dispute resolution and improve compliance confidence.
Overall, markets are likely to welcome GST 2.0 as a pro-consumption pivot that reinforces India’s domestic growth engine. While equity valuations may remain sensitive to global macro variables such as bond yields, tariffs, and capital flows, the phased rollout of GST 2.0 sets the stage for a durable demand recovery. With the first wave of reforms taking effect from September 2025 and the remainder expected by early 2026, broader market indices could begin reflecting improving consumption trends from late FY26, supporting a constructive medium-term outlook for Indian equities.
Disclaimer:
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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