Short end of the GST stick makes one shine, leaves another guessing

As the government’s GST rate cuts draw applause, two winners have already emerged — the Indian consumer and FMCG firms. The sector left holding the short end of the stick: Insurance.FMCG companies have extended the benefits of GST 2.0 with immediate reduction on price without any disruption, along with some discounts for festivals as they expect to enter a new growth phase after facing a few challenging quarters that saw persistent food inflation and slow pace of urban consumption.Companies operating in the space of FMCG products have issued revised price lists with new MRPs on their products, including soaps, shampoo, baby diapers, toothpaste, razors, and after-shave lotions. FMCGs in a good spotIn the world’s most populous nation, where consumption makes up more than half of GDP, FMCG firms are counting on GST benefits to lift demand after five inflation-hit quarters of weak growth.ALSO READ: GST removed from life, health insurance but how much will you gain?A recent study report released by industry body FICCI estimates that GST 2.0 will result in a short-term revenue loss but this can be compensated by the broader consumption boost, improved compliance, and wider coverage over time.Godrej Consumer Products MD Sudhir Sitapati said, “Not only the categories where rates have been reduced will benefit, but even categories where GST has not been reduced will see an uptick, as the overall available spend on consumption and discretionary expenses goes up.”Echoing this broader sentiment on consumer spend, dairy major Amul sees the impact playing out differently across its product range.ALSO READ: GST 2.0: The deals that can save you thousands and lakhs of moneyThe company’s managing director, Jayen Mehta said that while retailers were buying necessities like butter and cheese, there was some postponement for high value items like ghee, which will now get a boost as prices have become reasonable. “Due to increased offtake for high-value items and the spike in Navratri demand, trade billings will surge,” he said.The insurance dilemmaOne corner of the market that did not fully cheer the GST tax break was the insurance sector, which from September 22, has lost the ability to claim input tax credit (ITC) on GST paid on commissions and brokerage for individual health and life insurance policies.ALSO READ: Modi's Diwali gift unwrapped: GST reset kicks in, easing pressure on your walletAt first glance, removing GST appears to be a straightforward win for you. If you earlier paid Rs 1,180 on a Rs 1,000 premium (after including 18% GST), you will now only pay Rs 1,000. However, as former LIC member Nilesh Sathe explains, insurers used to claim input tax credit (ITC) on expenses such as agent commissions, electricity, reinsurance, outsourcing and administrative costs. For example, if Rs 150 was allocated for expenses, they could claim around Rs 27 as ITC. Now that the GST is exempted, insurers have lost this benefit.Now insurers are left with two choices: either absorb the loss by trimming their profit margins, in which case you gain the full 18% reduction, or raise the base premium from Rs. 1,000 to Rs. 1,027, meaning you still save, but closer to, say 15%. Which route insurers take depends on market dynamics. Term insurance, for instance, is a fiercely competitive segment where even slight price hikes can result in a loss of market share. In such cases, companies may prefer to live with thinner margins rather than risk losing customers. Either way, you still benefit.AMRG & Associates Senior Partner Rajat Mohan said, “While the reduced GST rates are designed to benefit consumers, service providers will absorb embedded GST costs on inputs. Careful accounting is needed to ensure proper ITC reversal where applicable.”The Central Board of Indirect Taxes and Customs (CBIC) has clarified that similar provisions apply to other services taxed at 5 per cent without ITC. For example, hotels offering rooms priced at ₹7,500 or below per day, and providers of beauty and physical well-being services, cannot claim ITC on inputs used exclusively for such services. Where inputs are used partly for these services and partly for other taxable supplies, proportionate credit reversal will be required.For goods impacted by GST rationalisation, the CBIC reiterated earlier guidance. Sand lime bricks’ GST has been cut from 12 per cent to 5 per cent, while other brick categories continue at 6 per cent without ITC or 12 per cent with ITC. In pharmaceuticals, relabelling of old stock is not required if revised price lists ensure compliance.