Nomura: GST Reform Could Lower Prices, Lift MSME Demand

India’s business community, especially its MSMEs, is closely watching the developments around the upcoming GST Council meeting, expected in the next fortnight. This meeting could bring one of the most impactful structural reforms in recent years—the removal of the 12% GST slab, a move that could boost affordability and demand across sectors like agriculture, consumer durables, and insurance.

According to a recent report by Nomura Securities International, a leading global brokerage and research firm, the GST Council may consider eliminating the 12% tax slab altogether, with the likely reclassification of products into either the 5% or 18% brackets. Although the GST rate rationalisation agenda has been under discussion since the 45th Council meeting in 2021, a consensus has yet to emerge. However, Nomura believes the upcoming meeting presents the strongest possibility yet for reform.

Relief for Tractor Buyers and Agri-MSMEs

The report highlights that tractors, currently taxed at 12%, may be moved to the 5% slab. If this materialises, it could significantly improve tractor affordability, especially as the sector braces for the upcoming TREM-IV emission norms, which are expected to increase base costs. Nomura notes that this tax reduction would allow tractor manufacturers like Mahindra & Mahindra(M&M) to pass on the benefit to end consumers, thereby boosting rural demand.

The report further notes that the price advantage may also enhance operating leverage and pricing power for manufacturers, which could indirectly benefit a wide network of MSMEs supplying components, spares, and servicing solutions across India’s rural economy.

Consumer Durables: A Potential Stimulus for AC Makers

Another item under the Council’s radar is air conditioners, which currently attract a 28% GST. Nomura's report observes that any downward revision in this rate—especially ahead of the new BEE efficiency norms set for January 2026—could offset expected cost increases and reinvigorate consumer demand.

While large firms like Voltas and Havells are expected to benefit, such a move could also stimulate demand across the distribution chains and contract manufacturers, many of whom operate in the MSME ecosystem.

Insurance Sector Could See Wider Reach

Nomura’s report also discusses the possibility of reducing GST on pure term life insurance from 18% to 5%, with continued availability of input tax credit for insurers. Such a move could make insurance products more affordable, especially for first-time buyers, and broaden penetration into untapped Tier 2 and Tier 3 markets. MSMEs in insurtech, digital distribution, and advisory services could gain significantly as premiums become more accessible.

Cess Restructuring: A Work in Progress

The report also discusses the fate of the Compensation Cess, which was introduced to offset state revenue losses post-GST implementation. Set to expire in March 2026, the cess might not be removed entirely but repackaged into two new levies—Health Cess and Clean Energy Cess. While no immediate relief is expected on the taxation of large cars and SUVs, the mechanism for sharing these levies with states could undergo structural change, requiring further legislative support.

What It Means for MSMEs

If these proposed changes come into effect, MSMEs across multiple sectors stand to gain, whether they’re manufacturing farm equipment, assembling white goods, or distributing insurance policies. For a sector that thrives on cost sensitivity and volume-based growth, a simplified GST structure could reduce compliance complexity and improve market competitiveness.

Rate rationalisation has long been a demand of industry associations, and Nomura’s analysis suggests that we may finally be nearing a turning point. While final decisions rest with the Council and its consensus model, the direction of policy appears firmly aligned with improving affordability and demand revival, critical drivers for MSME growth in India’s current economic landscape.