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Key Points

Morgan Stanley highlights that the GST Council's approval of a simplified two-rate structure will significantly boost consumption. The new rates, effective from September 22, will make a wide range of goods more affordable for consumers. The investment firm notes that this indirect tax reduction will particularly benefit low-income households. These changes are expected to provide a fillip to demand just as the festive season begins.

Key Points: Morgan Stanley Says GST Rate Cuts Boost Festive Consumption

  • GST rationalization to two main rates of 5% and 18% simplifies the tax structure
  • New rates effective September 22 align with the festive season onset
  • Rate cuts on autos, essentials, and insurance improve consumer affordability
  • Morgan Stanley estimates a 0.13% of GDP net fiscal impact from the changes
3 min read

GST rate cuts will improve affordability and give a fillip to consumption: Morgan Stanley

GST rate cuts from 28% to 18% on autos and 18% to 5% on essentials will boost affordability and consumption this festive season, says Morgan Stanley.

"We expect the improved affordability to give a fillip to consumption - Morgan Stanley Report"

New Delhi, September 4

Global investment bank Morgan Stanley notes that the rationalisation of the Goods and Services Tax (GST) structure, approved by the GST Council, is expected to significantly boost consumption in the coming months, coinciding with the onset of the festive season.

In its latest research report, the firm highlighted that the shift from the existing four-tier GST rate system to a simplified two-rate structure of a standard rate of 18 per cent and a merit rate of 5 per cent, will make a range of goods and services more affordable for consumers. A special demerit rate of 40 per cent will continue for a select few items such as tobacco products and luxury goods.

"We expect the improved affordability to give a fillip to consumption, especially as the new GST tax structure is effective from the start of the festive season," the report said, adding that the indirect tax reduction would help lift demand in a broad-based manner, particularly benefiting low-income households.

The new GST rates are set to come into effect from September 22, in line with Prime Minister Narendra Modi's announcement during his Independence Day address about next-generation GST reforms aimed at simplifying the tax regime and benefiting consumers.

According to Morgan Stanley, the government estimates the net fiscal impact of this rationalisation at Rs 48,000 crore, or about 0.13 per cent of GDP, after factoring in revenue foregone of Rs 93,000 crore and gains of Rs 45,000 crore from the new 40 per cent slab.

The rationalisation of rates gives benefit to a wide range of daily essentials, healthcare items, and consumer durables. For instance, GST on personal care products like hair oil, shampoo, toothpaste, and shaving cream has been reduced from 18 per cent to 5 per cent, while dairy products such as butter and ghee will now attract 5 per cent GST instead of earlier 12 per cent. Individual Health insurance and life insurance premiums have now been exempted from GST altogether.

In the auto sector, small cars, two-wheelers (below 350cc), and three-wheelers will now attract 18 per cent GST instead of the previous 28 per cent, while air conditioners and large television sets have also seen their rates slashed from 28 per cent to 18 per cent.

Morgan Stanley believes these measures may also have a marginal impact on inflation. "Headline CPI could see a downside of 20-30 basis points in FY26, aided by lower retail prices across categories, which will also help soften core inflation," the report noted.

The report added that improved consumption would eventually lead to higher tax buoyancy, helping offset the short-term revenue loss to the exchequer. The firm retained its GDP growth forecast at 6.7 per cent for FY26 and expects one more repo rate cut by the Reserve Bank of India later this year.

- ANI

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Reader Comments

R
Rohit P
Great move! The 10% reduction in GST on two-wheelers will make a big difference for many Indians. Two-wheelers are not luxury items but necessities for millions to commute to work. This is pro-common man reform.
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Arjun K
While I appreciate the rate cuts, I hope the government ensures that businesses actually pass on the benefits to consumers. Sometimes companies don't reduce prices despite tax cuts. Need strict monitoring!
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Sarah B
The exemption of GST on health insurance premiums is a brilliant move. Healthcare costs have been rising dramatically, and this will encourage more people to get insured. Much needed reform!
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Vikram M
ACs and TVs becoming cheaper just before festive season? Looks like many households will be upgrading their electronics this Diwali. Smart timing by the government to boost consumer spending 🎯
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Michael C
The simplified two-rate structure makes so much sense. The previous four-tier system was confusing for businesses and consumers alike. This is a step toward making GST truly 'Good and Simple Tax' as intended.
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Ananya R
Hope the inflation control mentioned in the report actually materializes. With rising food prices, any relief from other sectors is welcome. Lower core inflation could help RBI cut rates further 👍

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