Nifty soared on India’s GST reform amid Trump tariff tantrum

 

·         GST 2.0 is great and long overdue, but no ITC proposed in the 5% GST slab may increase the cost for businesses, despite higher affordability

·         To get 15% tariffs along with 7.5% state sales tax for Indian goods in the US, India has to reduce tariffs on US goods to at least 10% and IGST to 10% from 17.5% and 15% currently

·         There may be some short-term pain for long-term gain in GST 2.0

·         And deregulation and simplification would be vital for a lower cost of doing business in India

India’s benchmark stock index, Nifty, surged almost 1% Monday on India’s GST reform/recalibration. On August 15, 2025, in his Independence Day speech to the nation, Indian Prime Minister (PM) Narendra Modi announced a transformative "next-generation GST reforms" plan, aimed at simplifying India's Goods and Services Tax (GST) structure and stimulating economic growth. These reforms, expected to be implemented by Diwali (October 2025), involve consolidating the current four-slab tax structure (5%, 12%, 18%, and 28%) into a streamlined two-slab system (5% and 18%), with a special 40% rate for luxury and sin goods & service like tobacco and online gaming.

Auto and consumer durables outperformed on the sectoral front, buoyed by upcoming GST reforms. In his Independence Day speech on August 15, PM Modi revealed the government’s intention to rationalize GST rates by Diwali 2025, simplifying the tax slabs from four to two—5% and 18%—and eliminating the 28% and 12% rates. This reform could boost sectors like automobiles and cement. About 19 out of 30 stocks posted gains, led by Maruti Suzuki India, Bajaj Finance, UltraTech Cement, M&M, and Bajaj FinServ. On the other hand, ITC, Eternal, Tech Mahindra, L&T, NTPC, Sun Pharma, and Infosys lagged.

Additionally, S&P Global Ratings’ upgrade of India’s sovereign credit rating from BBB- to BBB with a stable outlook bolstered market sentiment on July 14, 2025. GST Reforms: The proposed reduction of GST slabs, with 99% of items in the 12% slab (e.g., butter, fruit juices, bicycles) moving to 5% and 90% of items in the 28% slab (e.g., refrigerators, air conditioners) shifting to 18%, fueled optimism for increased consumption, particularly ahead of the festive season. Broader markets also performed well, with the Nifty Midcap index rising 1% and the Nifty Smallcap index gaining 1.3%.  USDINR slips on GST 2.0 and increasing INR adaptability within BRICS.

• S&P Credit Rating Upgrade: The upgrade signaled confidence in India’s economic fundamentals, boosting investor sentiment, particularly in financial stocks

• Global Cues: Positive developments from the Trump-Putin meeting, which concluded with progress but no deal, alleviated concerns about immediate trade disruptions, contributing to global market stability.

Sectoral Performance: Out of 16 major sectors, 15 ended in positive territory, with auto (up 3.4%), consumer discretionary (up 1.8%), and metals (up 1.29%) leading the gains. On August 18, 2025, the Indian stock market rallied strongly, with the Sensex and Nifty surging around 1%, driven by optimism around GST reforms and an S&P credit rating upgrade. But overall, Dalal Street was quite choppy after the gap-up opening as the US cancelled BTA talks with India, scheduled in late August, and there is still uncertainty over Trump’s Ukraine war ceasefire/permanent peace plan and 25% additional punishment tariffs for Russian oil.

Auto stocks (Maruti Suzuki, Hero MotoCorp, M&M, TVS Motor, and Ashok Leyland), consumer durables (PG Electroplast, Voltas, Blue Star, Bata India, IFB Industries), cement (UltraTech Cement), and financials (HDFC Bank, SBI, Bajaj Finance) were among the top performers, benefiting from anticipated demand growth and positive sentiment.  However, sin goods companies (Godfrey Phillips, Nazara Technologies), select pharmaceuticals (Glenmark Pharma, Sun Pharma, Dr. Reddy’s), IT stocks (HCL Technologies, Infosys), and ITC faced negative impacts due to the proposed 40% GST on sin goods or sector-specific challenges. While short-term volatility may arise from delayed demand or FII outflows, the long-term outlook remains positive for consumption-driven sectors, contingent on the GST Council’s final decisions in September 2025.

The proposed GST rate cuts represent a bold step toward simplifying India's tax system and stimulating economic growth. By boosting consumption, supporting MSMEs, and enhancing export competitiveness, the reforms could add 0.6%-0.7% to India's GDP in FY26. The stock market is likely to see positive momentum in consumer-driven sectors like Automobiles, FMCG, consumer durables, and insurance, though short-term volatility may arise due to delayed demand. While fiscal challenges and state consensus remain hurdles, the reforms' focus on ease of living and doing business positions India for stronger economic and market performance in the long term.

The proposed Goods and Services Tax (GST) reforms in India, announced by Prime Minister Narendra Modi in August 2025, aim to simplify the tax structure by consolidating the existing four-slab system (5%, 12%, 18%, and 28%) into a two-slab system (5% and 18%), with a special 40% rate for luxury and sin goods. A key aspect of these reforms is the shift of approximately 99% of goods and services currently taxed at 12% to the 5% slab. However, there is a significant caveat: goods and services moved to the 5% GST slab may not be eligible for Input Tax Credit (ITC).

Goods and Services Moving to the 5% GST Slab: Based on available information, the GST reforms propose moving a wide range of goods and services currently taxed at 12% to the 5% slab to enhance affordability and boost consumption. The following are examples of goods and services likely to be included in this shift:

Goods:

·         Packaged Food Items: Butter, ghee, fruit juices, packaged drinking water, condensed milk, sausages, and other processed foods.

·         Daily Essentials: Soaps, toothpaste, detergents, and other household consumables.

·         Footwear: Footwear priced under ₹1,000.

·         Apparel: Certain categories of clothing, particularly mass-market items.

·         Agricultural and Small-Scale Equipment: Bicycles, sewing machines, and agricultural tools.

·         Miscellaneous Items: Umbrellas, dry fruits, and other small-ticket consumer goods.

Services:

·         Healthcare-Related Services: Potential inclusion of health and life insurance premiums, especially for senior citizens, though discussions are ongoing about reducing these to 0% in some cases.

·         Transportation Services: Non-AC train travel, metro rail services, and certain public transport services.

·         Education-Related Services: Coaching classes and other educational services are currently taxed at 12%.

The exact list of goods and services will be finalized by the GST Council in meetings scheduled for September 2025, but the focus is on everyday essentials and items that drive mass consumption, particularly for middle- and lower-income households.

Impact of No Input Tax Credit (ITC) on the 5% Slab: Input Tax Credit (ITC) allows businesses to offset the GST paid on inputs (raw materials, services, etc.) against the GST collected on their output (sales). The proposal to disallow ITC for goods and services moved to the 5% slab has significant implications:

Increased Costs for Businesses: Businesses manufacturing or supplying goods like butter, soaps, or footwear under the 5% slab will no longer be able to claim ITC on inputs, which are often taxed at higher rates (e.g., 18% for raw materials or packaging). This could increase production costs, as businesses absorb the tax paid on inputs without reimbursement. For example, a soap manufacturer paying 18% GST on chemicals and packaging materials but charging only 5% GST on the final product cannot offset the difference, potentially squeezing margins.

Price Dynamics:

·         Consumer Benefit: The shift to a 5% GST rate is expected to reduce retail prices for end consumers, boosting affordability and demand. For instance, the price of packaged food or footwear could drop significantly, stimulating consumption.

·         Business Trade-Off: Without ITC, businesses may pass on some of the increased input costs to consumers, partially offsetting the price reduction. However, competitive pressures in consumer-driven sectors may force companies to absorb these costs to maintain market share.

Impact on MSMEs:

·         Micro, small, and medium enterprises (MSMEs), which dominate the production of goods like soaps, footwear, and processed foods, may face higher compliance costs and reduced profitability due to the loss of ITC. This could disproportionately affect smaller players with limited pricing power.

·         However, the increased demand from lower GST rates could offset these challenges by driving higher sales volumes, particularly in tier-2 and tier-3 cities.

Simplified Compliance: The removal of ITC for the 5% slab aligns with the GST composition scheme, where businesses with annual turnover below a certain threshold (e.g., ₹1.5 crore) pay a flat tax rate without claiming ITC. This simplifies tax compliance for small businesses but limits their ability to reduce costs through input credits.

Effects on the Indian Economy

Consumption Boost:

·         Lowering GST to 5% on essentials like packaged foods, soaps, and footwear is expected to enhance affordability, driving consumption, which accounts for over 50% of India’s GDP; a policy/fiscal stimulus of 0.5%-0.7% of GDP (₹1.5-2 lakh crore) in FY26 due to increased demand for these goods.

·         The focus on mass-market items supports middle- and lower-income households, potentially reducing inflationary pressures on daily necessities.

Revenue Trade-Off:

·         The shift to 5% GST, coupled with the loss of ITC, could lead to an estimated revenue loss of ₹43,000 crore ($5-6 billion) annually, as the 12% slab contributes 5-6% of GST revenue. Without ITC, businesses may remit less tax overall, further impacting government revenue.

·         The government is banking on higher consumption and improved compliance to offset this loss, following the Laffer Curve principle. Simplified tax slabs may reduce evasion, but the fiscal impact could strain state and central budgets in the short term.

Support for MSMEs and Rural Economy:

·         MSMEs, which produce many of the goods moving to 5%, will benefit from increased demand but face challenges from the loss of ITC. The net effect will depend on their ability to absorb input costs or pass them on without losing competitiveness.

·         Rural demand for agricultural tools and low-cost consumer goods is expected to rise, supporting rural economic growth and job creation.

Export Competitiveness: The loss of ITC may increase costs for export-oriented businesses in sectors like textiles or processed foods, as they cannot offset input taxes. However, other GST reforms, such as correcting inverted duty structures, could mitigate this by reducing input costs for exporters.

Short-Term Pain

·         The announcement of GST cuts two months before implementation (October 2025) could lead to delayed purchases, as consumers wait for lower prices, potentially causing inventory pile-ups for FMCG and footwear companies. This could temper stock gains in the near term.

·         The loss of ITC may lead to short-term margin pressures, particularly for companies with high input costs, potentially causing stock price volatility.

Long-Term Gain:

·         The increased consumption from lower GST rates is expected to drive sales volumes, potentially offsetting ITC-related cost increases for large FMCG players like HUL and Nestle.

·         The broader market rally, supported by the S&P credit rating upgrade to BBB, suggests sustained bullish sentiment, particularly for consumption-driven sectors.

The shift of goods like packaged foods, soaps, and footwear under ₹1,000, and select services like insurance premiums to the 5% GST slab is poised to boost consumption and affordability in India. However, the loss of Input Tax Credit for these items could increase production costs, particularly for MSMEs and businesses with high input taxes, potentially squeezing margins. On August 18, 2025, the stock market rallied, with FMCG (HUL, Nestle, Dabur), footwear (Bata, Relaxo), and retail (Trent) stocks benefiting from demand optimism, though ITC and sin goods stocks (Godfrey Phillips, Nazara Technologies) faced negative impacts due to the 40% GST slab and ITC loss. Investors should monitor GST Council meetings in September 2025 for the final list of goods and services and assess how companies manage cost pressures without ITC.

GST: Good & Simple Tax or Gabbar Singh Tax?

The issue of multiple Goods and Services Tax (GST) rates applied to the same category of goods & services based on varieties or prices—such as popcorn or slippers—has been a significant point of contention in India’s GST framework since its introduction in 2017. The proposed GST reforms announced by PM Modi in August 2025 aim to address this complexity by consolidating the existing four-slab structure (5%, 12%, 18%, and 28%) into a two-slab system (5% and 18%), with a special 40% rate for luxury and sin goods. This section examines the issue of multiple GST rates within the same product category, using examples like popcorn and slippers, and analyzes its implications for the Indian economy and stock market, particularly in light of the proposed reforms and the restriction on Input Tax Credit (ITC) for items moving to the 5% slab.

The Issue of Multiple GST Rates on the Same Category: Regulatory and accounting issues

Under the current GST regime, items within the same product category are often taxed at different rates based on their variety, branding, packaging, or price, leading to immense complexity, disputes, and compliance challenges. This issue has been particularly evident in categories like popcorn and slippers, where differentiation in tax rates creates confusion for businesses and consumers.

Popcorn:

·         Current GST Rates: Unbranded, Unpackaged Popcorn (Loose): Taxed at 5%, as it is considered a basic food item akin to unprocessed grains.

·         Packaged, Ready-to-Eat Popcorn (e.g., Movie Theater or branded packs): Taxed at 12%, as it is treated as a processed food item.

·         Flavored or Branded Popcorn (e.g., gourmet or premium varieties): Taxed at 18%, reflecting added value or luxury positioning.

·         The differentiation between loose and packaged popcorn creates classification disputes, as businesses must determine whether their product qualifies as “basic” or “processed.”

·         For example, a small vendor selling loose popcorn at a fair pays 5% GST, while a cinema chain selling similar popcorn in branded packaging pays 12% or 18%, increasing costs for consumers and complicating compliance.

·         The higher tax on flavored popcorn discourages innovation in value-added products, impacting small-scale manufacturers.

Slippers:

Current GST Rates:

·         Footwear Priced Below ₹1,000: Taxed at 12%, targeting mass-market, affordable slippers and shoes.

·         Footwear Priced Above ₹1,000: Taxed at 18%, as these are considered premium or branded products.

·         Hawai Chappals (Basic Rubber Slippers): Often taxed at 5%, especially if unbranded and sold in rural markets.

·         The price-based differentiation creates ambiguity, as retailers must track the exact price point of each pair to apply the correct GST rate.

·         For example, a pair of slippers priced at ₹999 falls under 12% GST, while one at ₹1,001 is taxed at 18%, leading to pricing strategies that artificially keep products below the ₹1,000 threshold.

·         The distinction between “Hawai Chappals” and other slippers causes disputes, as manufacturers and tax authorities often disagree on what qualifies as “basic” footwear.

Other Examples:

·         Biscuits: Unbranded biscuits are taxed at 5%, while branded or premium biscuits (e.g., cream-filled or chocolate-coated) are taxed at 18%.

·         Textiles: Unbranded apparel below a certain value is taxed at 5%, while branded or high-value clothing attracts 12% or 18%.

·         Restaurants: Non-AC restaurants are taxed at 5% (no ITC), while AC restaurants or those serving alcohol face 18% GST, creating disparities within the same sector.

Classification Disputes:

·         Differentiating between varieties or price points within the same category leads to frequent disputes between businesses and tax authorities. For instance, determining whether popcorn is “ready-to-eat” or “gourmet” requires subjective judgment, increasing litigation and compliance costs.

·         The GST Council has faced criticism for arbitrary classifications, such as taxing “namkeen” (savory snacks) differently based on packaging or branding.

Compliance Burden-GST accounting nightmare: Businesses, especially MSMEs, struggle to maintain accurate records for products taxed at different rates within the same category. For example, a footwear retailer must track inventory separately for slippers below and above ₹1,000, complicating accounting and increasing operational costs. The complexity discourages small businesses from scaling up or innovating, as higher GST rates on value-added products (e.g., flavored popcorn) reduce competitiveness.

Consumer Confusion and Price Distortions: Multiple rates lead to inconsistent pricing, confusing consumers. For example, a moviegoer may pay more for popcorn at a cinema (12% or 18% GST) than at a local shop (5% GST), despite similar products. Businesses may manipulate pricing to stay within lower tax brackets (e.g., pricing slippers at ₹999 to avoid 18% GST), distorting market dynamics.

Impact on Input Tax Credit (ITC): Under the current system, businesses can claim ITC on inputs for goods taxed at 12% or higher. However, the proposed reforms suggest that goods and services moved to the 5% slab (e.g., popcorn, slippers under ₹1,000) may not be eligible for ITC, increasing input costs for manufacturers. For example, a popcorn manufacturer using packaging materials taxed at 18% but selling at 5% GST cannot offset the input tax, potentially squeezing margins or raising prices.

Proposed GST Reforms and Their Impact on This Issue: The 2025 GST reforms aim to address the complexity of multiple rates by moving 99% of goods and services currently taxed at 12%—including popcorn, slippers under ₹1,000, and other essentials—to the 5% slab. Key implications include:

Simplification of Rates:

·         Popcorn: All forms of popcorn (loose, packaged, or flavored) are likely to be taxed at 5%, eliminating the current differentiation between 5%, 12%, and 18%. This reduces classification disputes and ensures uniform pricing, benefiting consumers and simplifying compliance for businesses.

·         Slippers: Footwear priced below ₹1,000, currently at 12%, is expected to move to 5%, aligning with basic Hawai chappals. This removes the price-based distinction, making footwear more affordable and reducing the need for artificial pricing strategies.

Loss of Input Tax Credit: ITC

·         The restriction on ITC for the 5% slab could increase costs for manufacturers of popcorn and slippers. For instance:

·         A popcorn producer paying 18% GST on flavoring agents or packaging but charging 5% GST on sales cannot claim ITC, potentially raising production costs.

·         A slipper manufacturer using raw materials (e.g., rubber or plastic) taxed at 18% faces similar challenges, which could offset the benefits of lower GST rates.

·         Businesses may need to absorb these costs or pass them on to consumers, potentially reducing the price reduction impact of the 5% slab.

Economic Benefits:

·         Consumption Boost: Uniformly taxing popcorn and slippers at 5% will lower prices, driving demand, especially in mass-market segments. Citi estimates a 0.6%-0.7% GDP boost (₹1.5-2 lakh crore) in FY26 due to increased consumption of such goods.

·         MSME Support: MSMEs, which dominate the production of popcorn, slippers, and similar items, will benefit from higher sales volumes, though the loss of ITC may challenge profitability for smaller players with limited pricing power.

Revenue Implications: The shift to 5% GST for these items, combined with the loss of ITC, could contribute to an estimated revenue loss of ₹43,000 crore ($5-6 billion) annually. The government expects higher consumption and compliance to offset this, but short-term fiscal strain may impact state budgets.

Positive Impacts on Specific Sectors/Stocks

 FMCG Stocks (Popcorn and Packaged Foods):

·         Hindustan Unilever (HUL): HUL, which produces packaged snacks and foods similar to popcorn, benefited from expectations of higher demand due to the 5% GST slab. The stock was among the Sensex gainers, though specific gains were not detailed.

·         Nestle India: With products like Maggi and other snacks potentially moving to 5% GST, Nestle saw positive sentiment, as lower prices could drive sales volumes despite the loss of ITC.

·         Britannia Industries: Britannia, a leader in snacks and biscuits, likely gained from the uniform 5% GST on packaged foods, reducing complexity and boosting affordability.

Footwear Stocks (Slippers):

·         Bata India: The shift of footwear under ₹1,000 to 5% GST boosted Bata’s stock, as increased affordability is expected to drive sales of mass-market slippers. However, the loss of ITC may slightly pressure margins.

·         Relaxo Footwears: Relaxo, a major player in affordable footwear, likely saw gains similar to Bata, benefiting from the simplified 5% GST rate for slippers.

·         Metro Brands: As a retailer of both mass-market and premium footwear, Metro benefited from the GST cut on lower-priced slippers, contributing to the consumer discretionary sector’s 1.8% rally.

Retail Stocks:

·         Trent: Trent, a retail giant, gained from expectations of increased consumer spending on low-cost goods like popcorn and slippers, supporting its strong performance in the Sensex rally.

Negative Impacts on Specific Stocks

FMCG with High Input Costs:

·         ITC, which produces snacks akin to popcorn, was a top Sensex loser on August 18, 2025, due to its exposure to tobacco (facing a 40% GST slab). The loss of ITC on snacks moving to 5% could further pressure margins, negatively impacting its stock.

·         Godrej Consumer Products: Godrej’s snack and food products may benefit from the 5% GST, but the loss of ITC on inputs (e.g., packaging at 18%) could limit gains, potentially leading to underperformance compared to peers.

Small-Cap FMCG and Footwear Stocks:

·         MSME-Focused Companies: Small-cap companies in the Nifty Smallcap index (up 1.3%) producing popcorn or slippers may face margin pressures due to the loss of ITC. For example, smaller snack manufacturers or unbranded footwear producers could struggle to absorb higher input costs, limiting stock gains.

·         Sin Goods Stocks Godfrey Phillips: While not directly related to popcorn or slippers, the tobacco company’s decline highlights the broader negative sentiment for companies facing higher GST rates, which could indirectly affect diversified FMCG players.

Short-Term Volatility:

·         The announcement of GST cuts two months before implementation (October 2025) could lead to delayed purchases, as consumers wait for lower prices on popcorn and slippers, potentially causing inventory pile-ups for manufacturers. This could temper stock gains for FMCG and footwear companies in the near term.

·         The loss of ITC may lead to short-term margin pressures, particularly for companies with high input costs, potentially causing stock price volatility in the Nifty Smallcap index.

Long-Term Optimism:

·         The simplified 5% GST rate for popcorn and slippers is expected to drive sales volumes, particularly in mass-market segments, benefiting large players like HUL, Nestle, Bata, and Relaxo over time.

The issue of multiple GST rates on the same category of items, such as popcorn (5%, 12%, 18%) and slippers (5%, 12%, 18% based on price), has led to classification disputes, compliance burdens, and consumer confusion. The proposed GST reforms, set to take effect by October 2025, aim to address this by moving most of these items to a uniform 5% slab, simplifying taxation, and boosting affordability. However, the restriction on Input Tax Credit for the 5% slab could increase costs for manufacturers, particularly MSMEs, potentially offsetting some price benefits.

On August 20, 2025, Union Finance Minister Nirmala Sitharaman addressed the Group of Ministers (GoMs) constituted by the GST Council on Compensation Cess, Health & Life Insurance, and Rate Rationalisation at Vigyan Bhawan, New Delhi. She presented the Centre’s blueprint for next-generation Goods and Services Tax (GST) reforms, describing them as a step towards making India Aatmanirbhar (self-reliant). Sitharaman emphasized that the proposed GST rate rationalization, which may reduce the current four-slab structure (5%, 12%, 18%, and 28%) to two slabs of 5% and 18%, with a special 40% rate for 5-7 sin goods, will benefit the common man, farmers, the middle class, and MSMEs by enhancing affordability, boosting consumption, and making essential and aspirational goods more accessible. She highlighted that the reforms rest on three pillars: structural reforms, rate rationalization, and ease of living, aiming to create a simplified, transparent, and growth-oriented tax regime that supports manufacturing and MSMEs.

During the 20-minute address, Sitharaman urged states to support the transition, committing to building consensus in the coming weeks. The GoMs, over two days (August 20-21), are deliberating on these reforms, which include moving 99% of items from the 12% slab (e.g., pharmaceuticals, processed foods) to 5% and 90% of items from the 28% slab (e.g., electronics, cement) to 18%. Additionally, the Centre proposed exempting health and life insurance premiums for individuals from the current 18% GST, though some states expressed differing views, according to Bihar Deputy CM Samrat Choudhary, convenor of the insurance GoM. The GoM, comprising ministers from 13 states including Uttar Pradesh, West Bengal, Karnataka, Kerala, and Tamil Nadu, will submit its report to the GST Council by October’s end.

The GST Council, chaired by Sitharaman and including state finance ministers, is expected to review the GoM’s proposals in September 2025, with implementation targeted for Diwali 2025, as announced by Prime Minister Narendra Modi in his 79th Independence Day speech. SBI Research estimates a potential revenue loss of ₹85,000 crore annually (₹45,000 crore in the current fiscal if implemented from October 1), with the effective weighted average GST rate potentially dropping to 9.5% from 11.5%. The GoM on compensation cess is also discussing the future of the levy post-repayment of pandemic-era state compensation loans, with the regime set to conclude by March 31, 2026.

Now the question is whether Indian states will abide by the GST 2.0, and companies will demand ITC even for a higher rate slab instead of 5%. Overall, states and companies may seek a uniform 10% (for the previous 5-12%) and 20% (for the previous 18-28%) average slab with ITC.

The Goods and Services Tax (GST) regime in India is undergoing a significant overhaul, as announced by Prime Minister Narendra Modi on August 15, 2025, during his Independence Day speech. The proposed reforms, described as a “Diwali gift” for the common man, aim to simplify the existing four-slab structure (5%, 12%, 18%, and 28%, plus special rates like 0.25% and 3%) into a two-slab system, with a special rate for luxury and sin goods.

These changes are expected to be finalized by the GST Council in September 2025 and implemented by Diwali 2025 (late October or early November). The Finance Ministry has proposed moving 99% of items currently taxed at 12% (e.g., pharmaceuticals, processed foods, footwear under ₹1,000) to the 5% slab and 90% of items in the 28% slab (e.g., electronics, cement) to the 18% slab, with a special 40% rate for sin goods like tobacco.

Proposed Two-Slab Structure: Will the US agree to a sin tax of 40% on luxury cars?

·         The Finance Ministry has proposed a two-tier GST system with rates of 5% and 18%, alongside a 40% special rate for luxury and sin goods (e.g., tobacco, aerated drinks, and luxury cars).

·         12% Slab: 99% of items, such as pharmaceuticals (e.g., paracetamol), processed foods (e.g., butter, popcorn), and footwear under ₹1,000, are proposed to move to 5%. This aims to reduce the tax burden on essentials and resolve classification disputes (e.g., popcorn taxed at 5%, 12%, or 18% based on variety).

·          28% Slab: 90% of items, including electronics (e.g., ACs, TVs over 32 inches), cement, and paints, are proposed to move to 18%, making aspirational goods more affordable.

·         40% Slab: Limited to sin goods (e.g., tobacco, with an overall tax burden of 88% including cess) and luxury items, affecting only seven items.

Revenue-Neutral Rate (RNR) and Fiscal Impact: The Revenue-Neutral Rate (RNR) is the weighted average GST rate that ensures the government’s tax revenue remains unchanged after reforms. In 2017, the RNR was estimated at 15.6%, but it has dropped to around 11–11.5% due to successive rate cuts and improved compliance; GST 2.0 may further bring down the overall weighted average GST rate to ~9.5%. The proposed 5% and 18% slabs, with 99% of 12% items moving to 5% and 90% of 28% items to 18%, are expected to reduce the effective GST rate below the current RNR. The Finance Ministry estimates a revenue loss of ₹43,000 crore annually, but officials argue that increased consumption, reduced evasion, and a wider tax net will offset this, making the reforms “near revenue-neutral” in the long term.

Conclusions: The Business community may demand full ITC even under 5% GST regime

Input Tax Credit (ITC) Under the Proposed Reforms: Now, ITC is fully available for items in the 12%, 18% and 28% slabs (e.g., pharmaceuticals, electronics), allowing businesses to offset GST paid on inputs (e.g., APIs at 18%, packaging at 18%) against output tax; but items in 5% GST category do not have any ITC benefit for registered dealers under composite scheme. Currently, items in the 5% GST slab (e.g., unbranded foods, life-saving drugs, basic footwear) allow ITC for registered businesses under the regular scheme, but not for those under the composition scheme or specific services like non-AC restaurants and transport (no ITC).

The proposed GST reforms, set for Diwali 2025, will move 99% of 12% slab items (e.g., pharmaceuticals, processed foods) to 5%, with no ITC eligibility, increasing costs for businesses but boosting affordability. On August 18, 2025, stocks like HUL, Bata, and Cipla gained from demand optimism, while Glenmark, Sun Pharma, and ITC lagged due to ITC loss concerns. Investors should monitor GST Council meetings in September 2025 for the final ITC rules. The revenue of the government may not fall too much in 5% GST regime without any ITC in the long run. Also, history shows that producers generally do not pass any additional benefits for tax cuts to consumers in the long run.

Bottom line

India’s complex and very high GST 1.0 regime was long overdue for reform. The Modi admin took the step after being repeatedly called by the Trump admin as ‘King of Tariffs’ as US goods face ~17.5% weighted average tariffs and 15% IGST, totaling 32.5% tax in India. Indian goods are now also facing 25% tariffs and 7.5% average state sales tax in the US, totaling 32.5% tax. This is a reciprocal tax in Trump’s language. Trump is considering local VAT/GST/Sales tax also for various countries while setting the tariff levels.

The US has no Federal VAT/GST, but state sales taxes (w/o any ITC) in most of the states at an average rate of 7.5%. The EU has around 21.5% VAT on average. Thus, Trump imposed 15% tariffs on EU goods in the US, totaling 22.5% (15+7.5%) tax, while US goods will face 0% tariffs and 21.5% VAT, totaling 21.5% tax in the EU.

India’s effort to reduce GST is also intended to accommodate US business interests in India, including the potential reduction of 15% IGST. Many US luxury goods would be subjected to lower IGST in India, which was a primary demand from the US. To get 15% tariffs for Indian goods in the US along with 7.5% average state sales taxes, totaling 22.5%, India has to reduce its average tariffs on all US goods to 10% and IGST to 10-12% (say), totaling around 20-22% (as reciprocity in Trump’s language).

Technical outlook: Nifty Future, Bank Nifty Future, and USDINR

Looking ahead, whatever may be the narrative, technically Nifty (CMP: 24950) now has to sustain over 25155 for a further recovery to 25250/25300*25800/26000* and a further rally to 26100/26300-26400/26500; otherwise, sustaining below 25100/24800-24600/24400, Nifty Future may fall to 24300/24000 and 23600/23350*-23900/23750 and 23400*/23100-22600/22200 and further 22000-21700* the coming days.

Technically, Bank Nifty Future (56000) now has to sustain over 55600 for a recovery to 57000/57900 and only after sustaining 58100, may further rally to 58500/58900-60500/61000 and a further 61500-65750 in the coming days; otherwise, sustaining below 55500-400, BNF may further fall towards 55000-54900 and 54500/54000-53500/53000 and 52500*-52000/51500 and further 51000/50500-50000/49700 and 49200-47700 in the coming days.

Technically, USDINR-I now (87.75) has to sustain over 88.00 for a further rally to 88.50/88.75-89.00/89.50 and 90.00/90.50-91.00/91.50 and 92.50-94.50 in the coming days; otherwise, sustaining below 87.50-87.00, USDINR may again fall to 86.50/86.00-85.50/;85.00 and 84.00-83.50 in the coming days.

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