GST 2.0: Who Saves More on What and Who Pays for it

GST 2.0 reshapes household budgets with lower taxes on essentials, but what does it mean for the middle class?

GST 2.0 will see slashing of rates on food, health, fitness, insurance, and small cars. For middle class families, savings range from modest cuts in groceries to big relief on cars and health costs—but only if companies pass on the benefits.

(Photo: Aroop Mishra/The Quint)

Well, you all know the headline. GST 2.0 is here. Many things that we, the middle class, consume are now going to be taxless.

There are only two key rates left now: 5 percent and 18 percent. The 12 percent and 28 percent are gone. Yes, there is a new 40 percent rate which will be levied on things that the government considers to be "bad" for you and me, like sugary drinks, or luxuries that the rich buy—big motorbikes and big cars. The government thinks they can afford that, so they better pay the tax.

Most things that were earlier at the 12 percent rate have gone down to 5 percent. Some which were at 18 percent have also been brought down into the 5 percent bracket to make them affordable. Goods that were at 28 percent have mostly dropped to 18 percent, and a very small set out of that has moved to the 40 percent bracket. But even here, the final tax is likely to be lower since the extra cess that was imposed till now has been removed.

So here’s the key question for you and me: what does it really mean for the middle class?

Kitchen: Packaged UHT milk used to be taxed at 5 percent. Now it is entirely exempt. Packaged paneer and dahi too have gone into the zero GST list. Butter, ghee, cheese, tomato ketchup, biscuits, namkeen, pasta and noodles, which were taxed between 12 and 18 percent, have all been brought down to 5 percent. Even kitchen utensils like a karahi or tableware like forks and spoons have been reduced from 12 percent to 5 percent.

Bathroom and personal care items: Soaps, shampoos, hair oil, shaving cream—all of these have been moved from the 18 percent bracket to the 5 percent bracket.

Wardrobe: Clothes and shoes which cost between Rs 1,000 and Rs 2,500 earlier used to attract 12 percent GST. Now that has been brought down to 5 percent. But if you buy clothes and shoes that cost more than Rs 2,500, the GST burden will now go up from the old 12 percent to 18 percent.

Wellness and health: The GST rate on salons has been slashed from 18 percent to 5 percent. Gyms too—from 18 percent to just 5 percent. Similarly, yoga lessons or personal trainers who charged GST are now down to 5 percent.

Medicines will also cost much less. Commonly used drugs like paracetamol, painkillers, cough syrups are down from 12 percent GST to 5 percent.

Life-saving drugs, including those for rare disorders and cancer, are now completely tax exempt. The biggest healthcare bonanza is in health insurance premiums. Health insurance was being taxed at 18 percent GST. That has now become completely tax exempt.

Education: Much of it was already tax exempt, but certain regular expenses which were taxed at 12 percent—like notebooks, pencils, pens, erasers, rulers, reference books—have now become tax exempt.

Vehicles and durables: Smaller passenger cars and bikes get major cuts. Cars that are below 1,300 cc used to face 28 percent plus cess. That has been brought down to 18 percent now. Bikes that are 350 cc or less are also down from 28 percent to 18 percent.

Even bigger cars and bikes which have been moved up to the 40 percent GST slab will become cheaper because earlier they faced 43–50 percent effective tax; now it is 40 percent.

Luxury car makers have already announced price cuts. Other consumer durables like TV sets, refrigerators, air conditioners and washing machines are all down from 28 percent to 18 percent.

This is the broad sweep. Now let’s see the impact on families.

Which 'Middle Class' Families are Likely to Gain the Most?

Let's consider three scenarios.

Family A earns Rs 60,000 per month. They spend about Rs 21,000 on food. That will drop to about Rs 20,450, so they will save around Rs 550. Personal care expenses will drop by Rs 250, clothes by Rs 150, healthcare by Rs 250. Their average monthly expenditure on durables might drop by Rs 100. In total, this family might save about Rs 1,300 a month.

Family B, with a monthly budget of Rs 90,000, spends about Rs 27,000 on food. That will fall to Rs 26,300, saving Rs 700. Personal care items will drop by Rs 500. Clothing and footwear by Rs 300. Healthcare, insurance, wellness and fitness will save about Rs 800. Durables about Rs 500. Overall, about Rs 2,800 a month.

Family C, with a budget of Rs 1,20,000 a month, will save Rs 800 on food, Rs 800 on personal care, Rs 200 on clothes, Rs 1,000 on health and fitness, and Rs 1,000 on durables. Their expenses will go down by Rs 3,800 per month.

If we put these three families side by side, then Family A saves about Rs 1,300 a month or 2.2 percent of income. Family B saves about Rs 2,800 or 3.1 percent. Family C saves Rs 3,800 or 3.2 percent. This will only happen if companies pass on the full benefit of the rate cuts. They could also raise the base price so that retail prices remain the same.

What is likely is that companies will raise their base price slightly to improve profit margins, while consumers also benefit because the lower GST rates will bring the MRP down even after the base price is raised.

But here’s something to think about. Many of us now buy daily groceries from quick-commerce companies like Blinkit, Instamart or Zepto. Most products of daily use are already heavily discounted on these apps. So the big question is: will quick-commerce apps and supermarkets reduce prices further because GST is down, or will they reduce discounts instead, since they are already bleeding? Also, remember that these apps now have to pay 18 percent GST on delivery charges, which adds about Rs 2 to Rs 2.5 per delivery.

So in real terms, will an average middle-class family really gain from GST cuts on items of daily use? We will have to wait and see.

The things that will definitely become cheaper are cars of all kinds, health insurance, medical bills, fitness and wellness. That means the upper middle class is likely to gain the most from GST 2.0.

Watch the full video for more.

(The author was Senior Managing Editor, NDTV India & NDTV Profit. He tweets @Aunindyo2023.)