GST rate cuts on FMCGs to boost consumer demand

GST rate cuts on FMCGs to boost consumer demand

Effective from 22 September, it will simplify the tax landscape

The Goods and Services Tax (GST) rate cuts, announced during the 56th GST Council meeting chaired by Union Finance Minister Nirmala Sitharaman, represent a significant shift in India's tax policy for consumer goods.

The Council’s announcement of significant tax rate reductions on a wide range of everyday items expects to boost consumption and stimulate demand.

Sparking optimism among multiple brokerage firms about the Indian economy, the decision will shift the focus from capex-led growth to demand stimulation, putting FMCG stocks and consumer sectors in the spotlight.

Key Highlights

• Tax rates on several FMCG products have been reduced from 12 percent or 18 percent to 5 percent.
• Affected items include butter, ghee, cheese, namkeens, hair oil, shampoo, toothpaste, and shaving cream.
• Other household essentials like feeding bottles, clinical diapers, utensils, and sewing machines are also included in the rate cut.
• The new GST rates cover items from food products to TVs.
• Individual health insurance policies, including family floater and senior citizen plans, are now exempt from GST.

Meanwhile, brokerage firm Morgan Stanley viewed that food firms - Britannia, Nestle, and Tata Consumer were better positioned than home and personal care companies. And retailers such as Dmart, Nykaa, and Jubilant Foodworks will have a strong growth story.

While Jefferies stated that two-wheelers and small passenger vehicles would be the biggest beneficiaries, JPMorgan felt that Mahindra, Eicher, and Hyundai were the key beneficiaries.

Similarly, UBS said that the rate cuts would positively impact consumer durables companies like Voltas and Havells. And Britannia was a clear beneficiary in the FMCG sector.

Bernstein added that the fiscal impact would be manageable with a potential deficit widening of 20-40 basis points.

Impact on FMCG sector

The rate cuts are part of the government’s 'next-generation GST reform,' to simplify the tax landscape and boost consumption among the Indian middle class. It will have far-reaching implications for FMCG companies, leading to an increased consumer demand due to lower prices; margin pressures if companies pass on the full benefit to consumers, and volume growth in affected product categories.

On the other hand, sin goods such as pan masala, gutkha, cigarettes, and chewing tobacco were excluded from the reform and will be taxed at existing rates.

Companies in focus

Investors are likely to watch major FMCG players like ITC and Hindustan Unilever as they navigate the changes. The market will see how they adjust pricing strategies and whether the expected increase in demand materialises.

Meanwhile, earlier, Hindustan Unilever announced its participation in the upcoming investor meets – the 32nd CITIC CLSA Flagship Investors' Forum and the BofA Securities Asia Pacific Conference. It will now have the opportunity to address queries on the impact of the GST rate cuts on their business strategy and financial outlook.