The 56th GST Council’s recent decision to exempt certain services like individual life and health insurance premiums from Goods and Services Tax (GST) and mass consumption items like Notebook/Exercise Book, UHT Milk, Paneer, Pre-packaged Roti/Chapati and Paratha, Certain Medicines etc. along with Rationalisation of the current 4-tiered tax rate structure into a citizen-friendly simple 2 rate structure with a Standard Rate of 18% and a Merit Rate of 5%; a special de-merit rate of 40% for a select few goods and services are no doubt a citizen-centric evolution of a landmark tax framework, which is intended to enhance the quality of life of every last citizen.
The general perception and expectation of the consumers is that when a product is exempted from a taxable category, the differential tax benefit is fully available to the consumer by way of price reduction. However, in all the cases, will the consumer get the complete benefit of the reduction in tax rate or rather will the manufacturer be able to pass on the full benefit of the tax reduction to the ultimate consumer?
The Author has his own doubt!! This is explained in few simple pointers as below:
1. If we take a pack of biscuit with MRP of Rs.5/-, the revised MRP of the said Pack should be Rs.4.45/- with the reduction in tax rate from 18% to 5%. Will it be a feasible option for the manufacturer to have that kind of MRP on the pack? Even we assume they revised it accordingly, as a consumer will we be able to pay that amount of Rs.4.45 in reality?
2. A candy of Rs.1/-, with reduction in GST Rate from 12% to 5%, should have revised MRP of Rs.0.94/-. Will the retail outlets refund the consumer Rs.0.06/-?
3. With the exemption of personal life and health insurance premium but with the reversal of input tax credit toward GST paid on expenses such as agent commissions, rent, or marketing services, which is going to be a cost to the Insurance Company, will they be able to pass on the full benefit to their service recipients?
4. Similarly, for goods also which are now from GST, the manufacturers will have to reverse a considerable amount of credit on inputs, input service and capital goods arising from expenses such as freight, warehousing, advertising, contract manufacturing etc. Not only the manufacturer, but every dealer in the complete value chain will have to reverse such credit accrued to them in relation to the supply of such exempt goods which becomes an additional cost and eventually reduces the output tax benefit arising from such exemption
5. Further, the reduction in tax rate from 12% to 5% or 18% to 5% can lead to inverted duty structure in certain Industries, especially Food Industry, which will lead to perpetual blockage of their working capital and eventually loss of differential input tax credit on input services and capital goods. After absorbing this loss, will they be able to pass on the benefit to the end consumer, as expected by the Legislature?
6. Not only the future supply on or after 22.09.2025, but there is a large concern for the opening stock on hand at the end of the dealer specially auto dealers who are foreseeing the loss of entire input tax credit towards GST Compensation Cess loaded onto the stock at their end. How can they be expected to pass on the commensurate benefit of the tax reduction to the end consumer?
7. As per normal practice, the dealers in Education Stationery Business holds on stocks for min 20-30 days and sometimes even more. Now, on 22.09.2025, they will be sitting on a huge quantity of opening stock of Exercise Book, Notebooks, Eraser towards purchase of which they paid GST @12% or 5%. However, subsequent supply becoming exempt from the given date, all such credit will be liable for reversal. This reversal once offset against the benefit arising out of outward liability practically they will be able to pass on miniscule benefit to the consumer i.e., only for the GST amount saved on their margin. An illustration is given below to explain this:
Whilst it is not the intention of the Author to dampen the mood of the consumers, it is also very important to remind them about the ground reality. It is also important for those consumers who are in expectation of getting full benefit of tax rate cut have started doing all sorts of “back of the envelope” calculations and moved by media gimmicks, postponing their decision of buying a particular goods / service.
The intent of this article is to present a candid reality check and to encourage reflection and not to offend or hurt anyone’s sentiments.
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