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* Following up on Prime Minister Narendra Modi’s Independence Day declaration to usher in GST 2.0 reforms, the GST Council has finalized and approved the measures, largely in the proposed form. The apparent centerpiece of these reforms is the rationalization of the currently complex four-tier rate structure (5%/12%/18%/28% - with cess in some cases) to a simplified, mostly two-tier rate structure (5%/18%) with a demerit rate of 40% for select items categorized as sin or luxury goods. Importantly, there are certain silent yet deep-impact reforms as well. The government is focusing on the ease of doing business and ease of living by bringing in several structural reforms in the GST structure and streamlining/expediting various processes. New rates will become applicable for most products/services from 22nd Sep’25, thus striving to pass on the benefits to end consumers during the festive season.

* A welcome boost to consumption and growth: This is the first big reform measure of the government in the current term, which will boost consumer sentiment and provide a consumption fillip. The measure should support growth and encourage longer-term capacity building to drive the economy toward greater self-reliance in a volatile and uncertain global scenario.

* Impact on fiscal balances should be manageable: As per the Finance Ministry estimates, the overall fiscal impact is manageable with likely net tax foregone of INR480b. The government has a strong track record of fiscal rectitude and most times, its estimates have been conservative, hence inspiring confidence. Moreover, the government has several levers to improve receipts in case the fiscal impact of the approved measures turns out higher than estimated.

* Anti-profiteering clause to be largely observed: The revenue secretary assuaged concerns over profiteering and a suboptimal flow-through to retail prices by reassuring that the industry will transmit the benefits of rate cuts. Since the GST’s inception, there have been 704 cases of profiteering, totaling to a rather miniscule amount of INR43.6b (60% was front-ended to the first three years, indicating steadily rising compliance with the spirit of anti-profiteering.

* Addressing the vexatious issues of inversion and blocked credits: The council has endeavored to resolve the vexatious inverted duty structure in several segments, such as textiles and fertilizers, while rendering ITC claim process easier now. Moreover, this will also help in transitioning toward a faster release of blocked credit, a major pain point for MSMEs, and enhance the ease of doing business, unlocking this critical segment of the economy.

* Key sector beneficiaries – The approved measures are likely to yield economywide benefits and favorably impact several sectors. Key segments/sectors that will benefit include: Automobiles (across most segments), Consumer Durables (RACs, TVs, DWs), Consumer Staples (food, fruit drinks, HPC), Cement, Hotels (sub-INR7,500 room rate inventory), Insurance (retail health and life), Retail (footwear, apparel – below INR2,500 price, electronic retailers), Renewables (solar cells), Oil & Gas (benefits through CNG cars), Banks+NBFCs (second-order beneficiary of better consumption demand), Logistics (second-order beneficiary of higher volumes), Quick Commerce (second-order beneficiary of higher volumes), and EMS (better demand for ACs).

* Key stock beneficiaries: Given the wide-ranging effect of the measures, many domestic-focused stocks are likely to benefit. Some of the key names include: Maruti, M&M, Ashok Leyland, HUVR, Britannia, Varun Bev, Ultratech, JK Cement, Havells, Voltas, Amber, Metro, Trent, LemonTree, Indian Hotels, Niva Bupa, HDFC Life, IGL, Acme Solar, Suzlon, Swiggy, Delhivery, ICICI Bank, HDFC Bank, Bajaj Finance, Shriram Finance (for detailed list, refer to Exhibit 1).

* Next waves of reforms in works: There will likely be a cavalry of reforms after GST 2.0, including the long-overdue factor market reforms, especially in land and labor, along with judicial reforms, faster approvals and permits, etc. In addition to policy changes, the focus will also be on improving the ease of living, decriminalizing trivial offences, and ironing out avoidable day-to-day hassles that reduce business efficiency.

* Our view: The resolute stance on simplifying the GST structure should not be seen just as ‘tax reform’ but more as ‘growth reform’. Through simplified rates and processes, the government intends to boost consumption sentiment. As the Prime Minister has indicated, there will be further reform measures across multiple domains, intended to unleash the animal spirits of the economy, providing a shield against the global geopolitical headwinds.

* The government is clearly in an overdrive to lift and stimulate the domestic economy, and the latest announcements on GST, once implemented, will be the first big structural reform of the government in the current term. In our view, this will also kickstart a cycle of positive uptrends for the Indian equity market, which has been a key underperformer over the past year. The current valuations at ~20.8x (vs. LPA of 20.7x) are reasonable and have room to expand given our estimates of double-digit PAT growth (10%/12% PAT growth for Nifty/MOFSL).

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