The government has recently hinted at a major overhaul of the GST system, under which nearly 99% of the items currently taxed at 12% could be moved to the 5% bracket. If implemented, this decision will not only benefit common consumers but could also have a direct impact on economic activity, consumption trends, various sectors, and investors.
Let’s break down the key changes being considered under the GST system and the sectors that stand to benefit if these reforms go through.
What’s Happening?
Prime Minister Narendra Modi, in his Independence Day speech, announced that ‘next-generation’ GST reforms would be rolled out before Diwali, a move he described as a double Diwali bonus for the people.
At present, GST has four main tax slabs: 5%, 12%, 18%, and 28%. The central government has submitted a proposal to the Group of Ministers (GoM) on GST, suggesting that the structure be simplified into just two primary categories i.e., ‘standard’ and ‘merit’, with special rates applicable to a few select items.
The most important change is that 99% of the items in the current 12% slab will be shifted to 5%, while 90% of items in the 28% slab will move to 18%. Currently, the 18% tax rate contributes about 65% of total GST collections, while the 12% slab accounts for just 5%. The 28% slab contributes 11%, and the 5% slab about 7%.
Why Change GST Rates?
The main aim behind this restructuring is to boost consumption and accelerate economic activity. In his speech, the Prime Minister said, “This Diwali, I am bringing a double Diwali for you. Over the past eight years, we have carried out significant reforms in GST, and now we are introducing next-generation GST reforms. These will substantially reduce the tax burden across the country, directly benefiting farmers, the middle class, and small businesses. Since GST is a consumption-based tax, the biggest beneficiaries will ultimately be consumers.”
According to the Finance Ministry, the phasing out of the compensation cess has created fiscal room for these reforms. The restructuring is expected to reduce classification disputes, correct the inverted duty structure, and further improve ease of doing business. The government’s broader objective is to make GST a simpler, more stable, and transparent tax system.
Who Benefits the Most?
If implemented, the proposed GST restructuring will make essential goods and services, such as daily-use items, food products, agricultural equipment, medicines, education, and insurance, cheaper. The biggest beneficiaries will be ordinary citizens, especially the middle class.
Similarly, goods currently taxed at 28%, like cement, air conditioners, dishwashers, monitors, projectors, set-top boxes, and televisions (LCD, LED), could move to the 18% slab. This would boost consumption in these sectors and directly benefit the companies operating in them.
What’s in it for Investors?
For equity markets, this could be positive news as several sectors may see a boost in profit margins and revenue growth. Brokerage analyses suggest that multiple industries stand to gain from the change, including two-wheelers, air conditioners, insurance, hybrid cars, garments, footwear, medicines, processed foods, non-alcoholic beverages, select apparel, white goods, and cement.
However, more than half a dozen ‘demerit’ items, such as cigarettes and online gaming, will now attract a 40% tax, replacing the current compensation cess.
Special rates will remain unchanged: diamonds will continue to be taxed at 0.25%, while gold and silver will stay at 3%, largely applicable post–value addition for exports. Petroleum products will continue to remain outside the GST framework.
What’s Next?
The government aims to implement these reforms by Diwali. The Finance Ministry has said the GST Council will take up the GoM’s recommendations in its next meeting, with an emphasis on early implementation within the current financial year to unlock the benefits quickly. The next GST Council meeting is expected in September.
A seven-member GoM panel, led by Bihar Deputy Chief Minister Samrat Choudhary, is currently reviewing these suggestions. The compensation cess regime is set to expire on March 31, 2026, which has provided the fiscal space for these changes.
*The article is for information purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
