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GST rate rejig: Tractors, ACs may emerge as key beneficiaries, says Nomura

Nomura on GST rate rejig: The long-pending overhaul of India's Goods and Services Tax (GST) structure may finally be gaining traction, with potential implications for sectors like agriculture and consumer durables. According to a recent note by Nomura, if the proposed rationalisation plan goes through - including the scrapping of the 12 per cent GST slab - tractors and air conditioners (ACs) could see meaningful tax relief that may drive demand and improve pricing dynamics. 'As highlighted in our analysis, tractors fall in the 12 per cent tax bracket. In the event this slab is removed, we believe tractors are more likely to be moved to the 5 per cent GST rate, rather than 18 per cent,' Kapil Singh and Siddhartha Bera of Nomura said. 'This should enhance affordability and stimulate demand, particularly ahead of the transition to stricter TREM-IV emission norms.' Nomura sees this as a tailwind for manufacturers like Mahindra & Mahindra (M&M), which commands a dominant share in India's tractor market. 'While OEMs are expected to pass on most of the tax reduction to end-users, the change could still improve pricing power and operating leverage,' the brokerage noted. The 12 per cent GST slab, introduced at the time of GST rollout in 2017, covers a wide range of goods, including packaged foods, household items, and select medical supplies. However, it has long been criticised as an unnecessary middle-tier that complicates compliance without delivering considerable revenue benefits. The GST Council, which is expected to meet later this month, is reportedly considering eliminating this slab entirely and migrating items to either the 5 per cent or 18 per cent categories. Durables, insurance may also benefit if slabs are realigned The consumer durables segment may also benefit, particularly ACs, which currently attract the highest GST rate of 28 per cent. 'ACs, along with TVs larger than 32 inches, are among the few household appliances still taxed at 28 per cent,' Nomura pointed out. 'If the Council decides to bring ACs down to 18 per cent, it would partially offset the cost impact from the upcoming Bureau of Energy Efficiency (BEE) norms effective January 2026, which are expected to increase prices by 3-5 per cent.' This could be particularly positive for listed companies like Voltas and Havells, with Nomura maintaining a 'Buy' rating on the latter. 'Any moderation in GST would help improve volume growth and mitigate the effect of cyclical input cost pressures,' the report stated. Term life insurance could also see a reprieve, with the GST rate on pure protection plans potentially being cut from 18 per cent to 5 per cent. 'Even at the reduced rate, insurers are likely to retain the ability to claim input tax credit,' Nomura added, suggesting that this could make term products more attractive to price-sensitive consumers. Compensation Cess regime may give way to targeted levies On the other hand, the end of the Compensation Cess regime - currently set for March 2026 - is unlikely to bring immediate relief for big-ticket items such as SUVs and luxury cars. Nomura believes the cess will likely be replaced with more targeted levies. 'We don't expect any material reduction in effective tax rates on large vehicles. The cess might be reintroduced under new heads such as a 'Clean Energy Cess',' it said. However, the introduction of any new cess outside the existing GST framework would require a constitutional amendment, as current GST law does not permit fresh levies of this kind. The Compensation Cess, originally designed to compensate states for revenue shortfalls post-GST implementation, has largely funded the Centre's borrowings during the pandemic. However, the proposed shift to a new cess framework - focused on health and sustainability - would require a constitutional amendment, as the current GST law does not allow the introduction of new levies outside the existing structure. 'The government appears to be signalling a shift away from transitional mechanisms to more policy-oriented levies that align with public health and environmental objectives,' Nomura concluded. While consensus on GST reform has proved elusive despite multiple Council meetings, including the most recent one in December 2024, Nomura's view suggests a window of opportunity may be opening for a long-awaited simplification of the tax structure.