GST Rate Cut: A Catalyst for Growth and FII Revival

The GST rate cut effective September 22, 2025 is the biggest tax overhaul since 2017, simplifying slabs to 5%, 18%, and 40%. Analysts believe this reform can revive consumption, strengthen earnings from FY26, and attract foreign institutional investors back to India. However, global risks such as US tariffs, valuations, and interest rate trends will remain critical in shaping investor sentiment.

Market Implications

• Analysts see this as a trigger for foreign institutional investors (FIIs) to return, though concerns remain over US tariffs, valuations, and weak corporate earnings.
• Indian markets have underperformed due to five consecutive quarters of single-digit earnings growth. HSBC expects growth to accelerate from Q3-FY26.

Investor Outlook

• Consensus projects 14% EPS growth in 2026, reducing risk of earnings downgrades.
• FPIs have sold ₹1.42 trillion worth of stocks in CY25, including ₹12,257 crore in the first four days of September.

Key Positives for FIIs

• GST rate cut
• Direct tax cuts (Budget 2025)
• Good monsoon → lower inflation & interest rates
• Likely US Fed rate cut

Risks

• Valuations (Nifty PE at 21x forward) remain a concern compared to peers like China.
• Demand recovery from GST-led consumption boost is uncertain, as companies have already passed on input cost savings without seeing demand pick-up.

Outlook

• Corporate earnings may improve in 2–3 quarters with cyclical recovery and base effects.
• A sustained strong growth phase depends on easing broader uncertainties to revive private sector “animal spirits.”

Earlier GST Structure (before Sept 22, 2025)

When GST was first implemented in 2017, the Council had approved a multi-slab rate system to balance revenue and affordability. The main slabs were:

• 5% – Essential goods (mass consumption items like food grains, etc.)
• 12% – Standard rate (intermediate category)
• 18% – Standard rate (most goods and services)
• 28% – High rate (luxury & sin goods)

Additionally, certain exemptions (0%) applied to basic necessities, and cess was imposed on items like tobacco, coal, and luxury cars.

New Structure (effective Sept 22, 2025)

As per the policy recast:

• 5% → Retained for essentials
• 18% → Becomes the broad standard rate (covering goods/services earlier in 12% and 18%)
• 40% → Introduced as a new rate, specifically for luxury and sin goods (merging the earlier 28% + cess model into a higher uniform slab)

GST Slab Comparison

Slab	Old Structure (2017–Sept 21, 2025)	New Structure (w.e.f. Sept 22, 2025)	Examples
Exempt (0%)	Basic food items, fresh fruits & vegetables, education, healthcare	Retained	Rice, wheat, fresh milk, medical services
5%	Essential goods and services	Retained for essentials	Edible oil, sugar, footwear below threshold, cab rides
12%	Standard rate for intermediate goods/services	Removed – merged into 18% or 5%	Processed food, mobile phones, fertilizers
18%	Standard rate for most goods & services	Retained as main standard rate	Electronics, restaurants (non-AC), telecom, financial services
28% (+ Cess on sin goods)	Luxury goods and sin items (cars, tobacco, aerated drinks, etc.)	Replaced by 40% slab (higher consolidated rate)	SUVs, tobacco, pan masala, aerated drinks, luxury hotels
40% (new)	Not applicable	New slab for luxury and sin goods (absorbing 28% + cess model)	High-end cars, premium liquor, tobacco products

While the GST rationalisation sets a strong foundation for growth and is expected to revive consumption and corporate earnings over the medium term, global factors such as US tariffs, interest rate movements, and relative market valuations will continue to influence FII sentiment. Nonetheless, this reform has provided the much-needed policy push to strengthen India’s growth outlook and may well trigger the return of foreign capital flows to Indian markets.