GST Diwali Dhamaka has a catch, but govt is watching

The government is keenly monitoring businesses and industry to ensure that the GST rate cuts, effective from September 22, first day of Navratri, reach the common person. A day after the sweeping reforms in the GST, Prime Minister Narendra Modi hailed, what he called, the "Diwali Dhamaka". The use of "Diwali Dhamaka" was seen as a reference to the deadline the PM had set for the benefits of the reduced rates on a whole range of goods and services to reach the consumers during the month-long festive season which has traditionally seen a surge in consumer spend.

However, there are concerns whether businesses and industry will pass on GST cuts to the consumer immediately. Stock indices ended marginally higher on Thursday, giving up most of the early gains that were fuelled by the GST cuts announced late Wednesday. As per experts the market gave up the gains as it awaits more visible signs for the demand environment to improve.

Aware of this catch, the government is all set to ensure that the GST cuts reach the end consumer.

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What's the govt doing to ensure GST relief reaches the common man

The finance ministry, in coordination with other ministries, will closely monitor the implementation of the reduced GST rates to ensure that the relief is passed on to the common man, minister of state for finance Pankaj Chaudhary said on Thursday. “The government is serious about the benefits (of rate cuts) reaching the common man, and we will work with relevant ministries and keep an eye on it,” Chaudhary told ET in an interview. The government will run a campaign for this purpose, he added.

Senior govt officials told TOI the indirect tax authorities are collecting current prices of goods and services and will compare them with prices once the new GST rates kick in. "The transmission of cuts can take a few days as adjustments are needed, but govt will be watching," the official said.

NDA MPs have been asked to keep a tab to ensure the gains are not pocketed by companies. "The objective is to ensure consumers start getting the benefits during Navratri, and the impact of changes is tangibly felt by Diwali," an official, referring to the cutoff date set by PM Modi, told TOI. Industry sources said the finance ministry has reached out to some of them with this message. While the law lets govt use anti-profiteering clauses, it wants industry to voluntarily share gains with consumers.

Also Read: New GST rates list 2025: Full list of items with revised rates

Commerce and industry minister Piyush Goyal said he has asked industry to pass on the benefits of lower goods and services tax (GST) to consumers and the industry has committed to do so. “My request to all of you, please do ensure that every single rupee saved through GST reduction is passed on to the consumer. The benefit from this new rate in many of the cases, I think, 5% in almost across your industry, all the products. It's a huge saving, a huge demand booster. We all know that with lower prices, our demand goes up,” Goyal said addressing Bharat Nutraverse 2025.

These lower rates will support the growth of demand and industry. The scale of operation in the country will grow by leaps and bounds. Greater demand will lead to greater investment, greater jobs, and the virtuous cycle of growth will get a leg up and a big boost,” he said, adding that this “Diwali gift” will contribute to ease of living and better quality of life for 1.4 billion citizens.

Speaking to news agency ANI, Goyal said, “We have received assurance from all sectors of industry, different levels, big and small, have committed that we will pass on the entire benefit to the common man. We are very confident that they will meet our expectations.”

“So I think they will certainly pass it on, and we have sought a commitment from everybody, which we have received. Obviously, there are also mechanisms in place to monitor it, and the consumer affairs department and finance will certainly be involved in this process," he added.

Also Read: GST: Once branded Gabbar Singh Tax, it turns out to be Good and Simple Tax

The states and the Central Board of Indirect Taxes (CBIC) and Customs will also engage with industry on the issue. "...last time, industry had passed on the benefits of rate cuts and you would have seen that a lot of industry have come out and committed to transmitting this benefit... we will engage with industry and ensure that benefits are given to the consumers," Revenue Secretary Arvind Shrivastava said at a press conference.

Several companies, including Amul, Mondelez, Godrej Consumer Products and Colgate, have committed to ensuring that cuts flow through to shoppers, TOI reported. Meanwhile, industry chambers called on companies to reduce prices, in line with the tax cuts. Ficci senior vice-president Anant Goenka said the lobby group will work with its members to ensure the benefits are passed on to consumers. CII director general Chandrajit Banerjee, too, said that industry will act swiftly to lower prices and lift demand and create jobs. "Assocham encourages industry to pass on these benefits to the consumers, which will help increase consumption and thereby drive a virtuous economic cycle," added the industry body's president Sanjay Nayar.

Why concerns over the transmission of GST?

When GST was introduced in 2017, the government had put in place an anti-profiteering provision, which pushed industry to pass on the benefits. While the anti-profiteering agency has been disbanded, the provision still sits in the statutes. Revenue Secretary Shrivastava, however, suggested that industry was largely compliant, pointing out that 704 cases (60%) were registered in the initial years of GST, with alleged profiteering of Rs 4,362 crore.

Notably, in 2018, the National Anti-profiteering Authority said India’s biggest consumer goods company Hindustan Unilever Ltd (HUL) benefited to the tune of Rs 535 crore by not passing on gains from lower GST to consumers. However, the authority took into account the increase in grammage the company implemented to compensate for lower taxes under GST instead of lowering prices. In 2019, the Authority had ordered FMCG major Nestle to deposit Rs 73.15 crore with Consumer Welfare Fund for not passing GST rate reduction benefit to consumers.

Manoj Mishra, Partner and Tax Controversy Management Leader at Grant Thornton Bharat, said the absence of the anti-profiteering watchdog means much depends on competition. “For consumers, the reallocation of essential goods into the 5% bracket with ITC availability should bring visible price relief. However, for services, relief might be muted considering restricted ITC eligibility under the 5% bracket. Additionally, with the withdrawal of the anti-profiteering mechanism, the extent of pass-throughs will now depend more on competitive market dynamics than statutory mandate,” he added.

Govt expects competition to take care of price cuts in most sectors with officials arguing that industry recognises that those who don't pass on the benefits will suffer as consumers are sure to switch to those who reduce prices, TOI has reported. There are, however, concerns that some of the sectors, where cartelisation has been a concern, and insurance, where industry is worried over the withdrawal of input tax credit, may not transfer all the gains to the consumer. An official told TOI that public sector insurance companies, which include the four general insurers and the behemoth LIC, have been asked to pass on the entire benefit of exemption to consumers, a move that will make it tough for private players to avoid doing so. The GST Council led by finance minister Nirmala Sitharaman has decided to exempt life and health insurance purchased by individuals from GST, a huge gain given that these covers currently attract 18% tax. With the GST on cement lowered from 28% to 18%, a long-standing demand from the sector, the price of every bag is expected to come down by Rs 25 to Rs 30, JM Financial estimated.

Different industries react differently to tax changes. FMCG companies may pass on some benefits quickly to retain volume-driven business, whereas luxury goods, branded items, or electronics sectors may prioritize margin protection. Even within an industry, larger players with pricing power may behave differently from small, margin-sensitive firms. This heterogeneity makes it hard for the government to enforce a one-size-fits-all monitoring mechanism.

At the time of a rate cut, the market is often filled with existing stock purchased at higher GST rates. Retailers and wholesalers may choose to sell off this inventory at pre-existing prices to preserve profit margins or avoid accounting complications. The government’s rules allow for certain input tax credits to be claimed on old stock, but the process is not always seamless. As a result, businesses might delay reflecting lower prices until fresh inventory cycles in — which can take weeks or even months.

For many consumers, the price tag is the only reference point and few track tax rate changes. This lack of awareness gives businesses room to maintain existing prices despite lower tax obligations. Also, in the B2C retail space, MRPs are printed, and vendors may continue selling at the same MRP even if their tax liability has reduced. Unless the manufacturer revises MRPs promptly and clearly communicates it, the benefit may never trickle down.

Makers of daily essentials and staples, from snacks and confectionery to shampoo and tea, told ET a day before the GST cuts were announced they are working on restoring grammage in the smaller packs of Rs 5 and Rs 10 as it may not be feasible to cut those prices. “Since our products come at fixed prices of Rs 5 or Rs 10, it is impractical to change pricing,” Vipul Prakash, chief executive, DFM Foods, which sells Crax salty snacks, told ET. “We will, however, increase grammage per pack wherever possible.” This would be a reversal from the past two years, when companies resorted to shrinkflation — reducing weight or quantity in packs — while keeping prices the same amid steep inflation in raw materials and packaging.

The GST rationalisation of 2025 is a giant step towards compliance simplification and economic stimulus. But unless backed by effective implementation mechanisms, consumer awareness and industry cooperation, the actual transmission of these benefits may remain partial or delayed.

(With inputs from TOI)