By – Dhruvi Solanki

Abstract

India’s recent Goods and Services Tax (GST) rationalisation was expected to provide relief to consumers by lowering prices and easing inflation. However, despite reductions in GST rates across several categories, retail prices have largely remained unchanged. This article examines why GST cuts have not translated into visible price reductions. It explains how manufacturers, intermediaries, and retailers absorb tax benefits. While rising costs, market power, and weak enforcement prevent effective price transmission. It argues that fiscal policy alone cannot shape consumer prices without competition, efficiency, and accountability.

Introduction

Whenever the government announces a tax cut, consumers expect prices to fall. This expectation became stronger after the GST 2.0 rate cuts, which promised relief on essentials, automobiles, and consumer goods. However, consumer experience has been very different. A nationwide Local Circles survey on whether GST benefits reached consumers showed that nearly half of the respondents did not notice any reduction in prices after GST cuts, especially for groceries and packaged food. This gap between policy intent and consumer experience exists because prices are not controlled by taxes alone. They are shaped by costs, margins, competition, inventory cycles, and bargaining power across the supply chain.

Purpose of GST Rationalisation and Why Prices Did Not Fall

GST rationalisation aimed to simplify tax slabs and ease inflationary pressure on households. By lowering indirect taxes, the government hoped to reduce prices and boost consumption. The expectation was that firms would pass on tax savings to consumers. However, real-world markets do not always work this way. When businesses face rising costs elsewhere, tax relief often prevents prices from rising further rather than pushing them down. This explains why GST cuts did not automatically translate into cheaper goods at the retail level. Manufacturers were already under pressure when GST cuts were announced. Rising fuel costs, higher freight charges, and expensive raw materials had squeezed margins. Evidence from the FMCG (Fast – moving consumer goods) sector shows that companies continued to face cost pressures from commodities and logistics, even after tax relief. Instead of cutting prices, many firms chose to absorb GST benefits to protect profitability. This behaviour is not illegal or unusual. From a business perspective, using tax savings to stabilise margins during a cost-heavy period is rational. From a consumer’s perspective, however, the tax cut becomes invisible.

Supply Chain Absorption and Market Power

Between manufacturers and consumers lies a dense network of distributors and retailers, which plays a decisive role in price transmission. Retailers often hold stock purchased at older, higher tax rates. Cutting prices immediately would mean selling that inventory at a loss. Therefore, reporting on why GST rate cuts do not immediately reflect in shop prices shows that retailers usually wait until old stock is cleared before changing prices. This delay is especially common among small retailers with thin margins. As a result, GST benefits often remain trapped within the supply chain instead of reaching consumers.  Market structure further weakens price transmission. In sectors such as packaged foods, FMCG, and consumer durables, a small number of firms dominate sales. This gives them pricing power. Issues regarding pricing discrepancies in low-unit FMCG packs after GST cuts were flagged, where some firms raised base prices or adjusted pack sizes instead of reducing prices. In markets with limited competition, firms face little pressure to pass tax savings on to consumers.

Rising Costs, Regulation, and Enforcement Limits

GST rationalisation also coincided with rising transportation and logistics costs. Fuel prices directly affect the cost of moving goods across the country, especially in a road-dependent economy like India. This meant that GST relief was often used to offset higher operating costs rather than reduce prices. In many cases, prices stayed the same instead of falling. For consumers, this felt like no benefit at all, even though prices might have risen without tax intervention. India’s GST law includes anti-profiteering provisions to ensure that tax benefits are passed on to consumers.The Delhi High Court ruling on GST pass-through made it clear that consumers must see an actual reduction in prices, not indirect adjustments like higher quantities or changed packaging. Despite this, enforcement remains uneven. Monitoring millions of products across India’s fragmented retail market is extremely difficult. As a result, compliance depends more on competition than regulation.For consumers, the outcome has been frustrating. Household spending on essentials remains high. The LocalCircles consumer survey found that only a small share of consumers felt they received full GST benefits, while many saw no change at all. However, inflation data suggest that GST cuts helped prevent sharper price increases. According to Consumer Price Index data released by MOSPI, inflation remained relatively controlled despite rising global and domestic cost pressures. This suggests that GST relief acted more as a buffer than a price-cutting tool.

Real Evidence of Uneven GST Pass-Through

The experience of consumers after the GST 2.0 rollout shows that savings from tax cuts were passed on unevenly, not universally. A detailed survey of over 18,600 purchasers found that only about 23 % of appliance and electronics buyers reported receiving the full benefit of lower GST, while 34 % saw partial benefits and 20 % saw no benefit at all, even though taxes on these items were cut from 28 % to 18 % in September2025. This highlights that a significant portion of consumers did not see the full tax relief reflected in prices paid at retail or online. For other product categories, the pass-through was even weaker. In a separate survey of purchase behaviour, only about 10% of buyers reported getting the full GST benefit on medicines, and nearly two-thirds said they received no benefit for such purchases despite tax cuts on many medical products.  These trends are supported by consumer complaints filed after the GST changes. The National Consumer Helpline logged nearly 4,000 complaints in the first week of GST 2.0 implementation about products not reflecting reduced tax prices, covering items such as electronics, milk products, and other daily-use goods.  This data reveals a concrete pattern: a large share of consumers did not see proportional price reductions at the point of purchase, even when GST cuts were implemented. These uneven outcomes make it clear that tax cuts alone have limited power to reduce prices unless they are matched with strong enforcement, supply-chain alignment, and transparent pricing mechanisms.

Conclusion

Recent GST cuts highlight the limits of fiscal policy in controlling consumer prices. While GST rationalisation aimed to ease inflation and support consumption, its impact on retail prices was diluted by rising costs, inventory rigidities, market concentration, and weak enforcement. Manufacturers used tax relief to stabilise margins during a difficult cost environment. Retailers delayed price changes to avoid losses on existing stock. Dominant firms retained pricing power in markets with limited competition. Together, these factors weakened the link between tax cuts and consumer prices. Although consumers did not see visible price reductions, GST cuts likely prevented sharper price increases. This underlines an important lesson: tax policy cannot work in isolation. For prices to fall meaningfully, tax cuts must be supported by competitive markets, efficient supply chains, transparent pricing, and strong enforcement. Without these conditions, GST reductions will continue to protect business margins more than household budgets.

About the Author

Dhruvi Solanki is a second-year Economics and Finance student at Symbiosis School of Economics and a member of the Economics and Finance Cluster of Nickeled & Dimed. She is an avid student of economic policy and market behaviour, with a strong interest in fiscal policy, consumer economics, and the real-world impact of taxation on markets and households.

Image Source :https://www.reuters.com/world/india/indians-spending-less-food-more-discretionary-items-government-survey-2024-02-25/