In GST 2.0 calculus, behavioural nudges — packaged foods to ACs

There was a feeling that the earlier major rate rationalisation exercises — carried out in November 2017, July 2018, June 2022 — had resulted in “piecemeal” results and the benefits had not exactly been passed on to consumers in a significant way, and therefore, there was a need to undertake reforms in a “holistic” manner, the official said.

Even before the final nod to the current round of rate tweaks, it had triggered an unintended behavioural change: the offtake of products such as consumer durables and cars seeing a marked decline, as consumers chose to wait for the promise of lower taxes to kick in, while insurance policy renewals were being delayed. Many FMCG dealers also refused to stock up from companies in anticipation of rate cuts. That is perhaps one reason why the Centre was keen the Council pushes through the proposal in one day flat.

The September 22 implementation date offers trade and industry some time to align their processes before the festive spending push, and comes well before the model code of conduct kicks in for the Bihar polls. The big question mark — how much of this would get passed on in terms of lower prices for consumers.

The new rates definitely would be a step in line with tackling the multiple classification disputes. Take for instance, papad, bread (branded or otherwise), that faced zero GST, but pizza bread, plain chapatti or roti used to be charged 5 per cent GST while paratha attracted 18 per cent tax. Now, all the Indian breads, whether it is pizza bread, khakhra, chapathi, roti, paratha, parotta or by any name, will be exempt. Or the case of various categories of popcorn – salted, regular, salted and spiced, and caramelised – that faced GST rates of 5 per cent, 12 per cent or 18 per cent and now all would be at a uniform rate of 5 per cent.

The signal is there for the food sector also, and a possible behavioural change that it could trigger, is an upgradation in offerings, as the discrimination against packaged food items in the GST regime so far goes. For instance, GST has been reduced to 5 per cent for packaged namkeens, bhujia, sauces, pasta, instant noodles, chocolates, coffee, preserved meat, cornflakes, butter, ghee, in what seems to be a push towards packaged, higher quality products.

In another instance, Indian cottage cheese or paneer supplied in pre-packaged and labelled form has won over cheese in the GST rate rejig by getting exempted (5 per cent GST earlier), while the rate on cheese is higher at 5 per cent (12 per cent earlier). “This (paneer) is mostly produced in the small-scale sector. The measure is intended to promote Indian cottage cheese,” the Ministry of Finance elaborated the reasoning behind the decision in a set of FAQs.

Then there is also the exemption provided to ultra-high temperature milk – a chance that was missed earlier during the rate rationalisation exercise of 47th GST Council meeting held in Chandigarh in June 2022 – which now brings the key ingredient in baking, creams or flavoured drinks at par with nil GST for fresh milk and pasteurised milk, not concentrated nor containing added sugar.

The move towards rate rationalisation of newer items, especially for lower and middle-income groups, may be met with initial scepticism, but could eventually result in a broad-based consumption shift, the official said.

Giving an example of the time when a top FMCG company used to have a one-soap-for-all purpose strategy, the official said it faced resistance initially when it introduced shampoo in bottles, so much so that to make it attractive in cost terms, it introduced sachets to cater to its market base with small and affordable packaging. “That 1 rupee rate for a sachet captured more market base than a Rs 20 shampoo bottle. And, the consumption even turned much more favourable for sachets as people realised its utility is much more because the 1 rupee sachet could be used multiple times. This led to consumption pattern changes,” the official said.

There is a similar push in the automobile sector with reduced tax rates on certain classes of cars and motorbikes, with petrol, diesel and hybrid cars previously taxed effectively at the 43-48 per cent range (28 per cent plus cess) now set to attract only 18 per cent GST, provided they fall within the current small car definition: those below 4 metres in length and equipped with smaller than 1,200 cc petrol engines or below 1,500 cc diesel engines. Motorcycles with engine capacity below 350 cc will also see a tax drop from 28 per cent to 18 per cent.

The tax reduction on small cars and small capacity motorcycles will definitely be a boost to the automobile sector, especially in a segment where sales have been flagging over the last 24 months. The problem here is that unlike the liberative behavioural nudge in the food segment, there is an indication of size being a restraining factor in this sector. This seems to overlook the fact that most of India’s motorcycle and car manufacturers are also exporters, and norms that are not in sync with global trends – such as the 4 metre length norm for cars or 350 cc engine capacity threshold for motorcycles – end up shackling manufacturers while also sending a potentially negative signal when it comes to consumer aspirations. Large engine capacity motorbikes – those above 350 cc that used to attract an effective tax rate of 31 per cent earlier (28 per cent GST and 3 per cent cess) – will now be taxed at 40 per cent, effectively putting them in the same category as “sin goods”, like tobacco and pan masala. That move has been trashed by most two-wheeler companies.

Larger cars will also see some benefit as the earlier tax structure took the effective tax rate to 48-50 per cent, which will now attract only a GST amount of 40 per cent, irrespective of the powertrain. Also, while there was talk of the tax being hiked on luxury EVs, the rates have been surprisingly kept the same, at 5 per cent. This is despite the growing sense that the battery electric vehicle or BEV ecosystem is being increasingly dominated by China, and that stranglehold will continue to tighten.

Also, while the push is for the small car segment, which saw significant lobbying, it is likely that consumer buying behaviour could tilt in favour of SUVs that fall in the upper end of that bracket: 1200 cc petrol engines that are under 4 metres in length. The SUVs in this category could have an advantage over small hatchbacks. The nudge might have been aimed at hatchback buyers, but mini-SUVs could end up gaining.

The rationalisation of GST on air-conditioners and televisions from 28 to 18 per cent could directly boost consumption, especially going into the festive season. This also seems to factor in the reality of ACs becoming more ubiquitous now.

“With this reduction, products that were earlier seen as aspirational are now more accessible, allowing a larger section of households to upgrade to energy-efficient and connected appliances. This move, coupled with the recent revision in the income tax slab exempting annual earners up to Rs 12 lakh, is expected to significantly boost disposable incomes and consumer sentiment,” according to Manish Sharma, Chairman, Panasonic Life Solutions India. The question here too is how much would be passed on.

The lower GST on construction materials like cement could, according to Anuj Puri, Chairman – ANAROCK Group, reduce construction costs by as much as 5 per cent. Developers, especially those engaged in creating affordable housing, could get major relief in terms of cash flows and margins. The affordable housing category (below Rs 40 lakh) has seen its share of total sales decline from 38 per cent in 2019 to just 18 per cent in 2024 and the share of new supply dropped even more dramatically from 40 per cent in 2019 to just 12 per cent in H1 2025, according to ANAROCK research. The reduced construction costs, if passed on to homebuyers, can trigger a behavioural shift and boost demand in these segments.