GST rejig may not bring immediate relief on zero-tax items; Kerala may face fiscal risks

The Goods and Services Tax (GST) rate rationalisation is intended to reduce the burden on consumers and improve market efficiency, but tax experts believe that the price benefits are likely to filter through gradually rather than immediately, especially across categories with reduced or zero tax rates.

The revised GST structure will come into effect on September 22, with two primary slabs of 5 per cent and 18 per cent, alongside a 40 per cent levy on specified sin and luxury goods. Most essential consumer items, including bread, chapatis and milk, will be exempt from taxation.

"For most items that have moved to a zero-tax slab, the price benefit is expected to take some time to reach consumers. This is because existing stock in the supply chain was procured under the old GST rates, and businesses will still have to pay tax on goods purchased before September 22. As a result, customers are likely to see only a marginal reduction in prices initially, rather than the full benefit of the tax cuts," a government official told Onmanorama.

Thus, businesses can continue to utilise input tax credit (ITC) on goods purchased before September 22 when selling them after the new GST rates take effect, subject to eligibility rules. Retail prices for such products should display the revised GST rate in the MRP, while ITC remains an internal set‑off at the seller’s end.

This is just one side of the story. It has long been discussed that companies might raise the prices of various goods, potentially offsetting the benefit of the tax relief. Recently, Kerala Finance Minister KN Balagopal, citing the example of cement manufacturers, said they had raised prices by ₹30, even though the GST reduction offered a comparable relief of ₹28–₹30 per bag.

Though Balagopal assured that the GST department and the Kerala government would take steps to ensure the benefits of the rate cuts reach consumers, public concern remains. Much of this apprehension stems from the experience in 2017, when GST was first introduced.

At that time, GST replaced the earlier system of state taxes and VAT with a unified tax structure. However, the expected relief did not fully reach consumers, as many companies offset the tax reductions by increasing the prices of goods alongside the implementation of GST.

Adding to these concerns is the discontinuation of the anti-profiteering mechanism introduced in April 2025. This system was initially introduced under GST to make sure businesses passed on the benefits of lower tax rates and increased ITC to consumers by reducing prices accordingly. But with the scheme now gone, there is no robust mechanism in place to monitor whether companies are increasing prices to pocket the benefits, potentially undermining the objectives of GST 2.0.

However, GST department officials said they are aware of the situation and have taken steps to prevent such practices. "We have been monitoring the prices of goods over the past few months. On September 22, we will assess whether the prices of goods reflect the new tax rates," said an official at the GST department. 

Kerala inflation may ease
Despite the concerns raised, the GST rate rejig is expected to boost economic activity across the country. For a consumer-driven state like Kerala, the impact is likely to be particularly significant.

When prices of goods come down, consumers are left with more disposable income, which they are likely to spend on other products. In such a scenario, even if the government collects a lower tax on a single item, it benefits from the tax collected on multiple goods due to increased consumption. This is the fundamental expectation of how the GST rate rejig could stimulate market activity.

For businesses, the resulting rise in demand is expected to create new opportunities, potentially leading to increased investments and job creation.

This could be summed up with what Balagopal said earlier. Though he acknowledged that the state could face a revenue loss of up to ₹8,000 crore following the GST rate changes, he noted that in the long run, the move is expected to stimulate market activity. The official also shared a similar view, stating: "Economic activity will get a boost from the rate revision."

Kerala’s inflation, which has been the highest in the country for eight consecutive months and stood at 9.04 per cent, makes any economic stimulus particularly welcome news for the state.

Govt jobs at risk?
As the Kerala finance minister acknowledged, the state may see a dip in the revenue from GST collection. This, in turn, might force the government to tighten its spending.

Experts suggest that to offset the rising expenditure on salaries and welfare schemes, the state may increasingly turn to AI-driven solutions to improve efficiency and reduce operational costs across public institutions.

While staff hiring, a political hot potato, may not see a complete freeze, experts expect the government to tweak that expense head to keep the payouts in check.

An official, speaking on condition of anonymity, said that Kerala is unlikely to benefit significantly from corporate tax collections compared to other states, as it has relatively limited manufacturing activity and a smaller corporate base. GST remains the single largest source of revenue for the state, alongside taxes on alcohol and petroleum. Any dip in that could have a serious impact on the state’s ability to fund its welfare schemes.

Nonetheless, for consumers in the state, the revised GST rates are a welcome move, as many essential goods are expected to become more affordable, potentially increasing household purchasing power.