India has cut taxes on hundreds of goods to boost consumption and mitigate the potential impact of steep US tariffs.
Finance Minister Nirmala Sitharaman said on Wednesday that the Goods and Services Tax (GST) panel had simplified the consumption tax into two slabs - 5% and 18% - doing away with an earlier four-slab structure. There will be a separate 40% tax on sin goods like cigarettes.
Goods set to become cheaper include food items, school supplies and insurance while imported liquor and premium cars would become costlier.
Stock markets rallied on the announcement. But analysts say the slashed taxes could lead to revenue losses of up to $6bn for the government.
The new rates will come into effect on 22 September, which is around the time India’s festive season is set to begin. It’s a time when sales of electronic goods such as ACs, TVs and other household appliances shoot up in the country and cheaper prices are expected to boost them further.
The cuts come on the back of a $12bn income tax giveaway announced in the budget earlier this year, and as India’s central bank has begun cutting the cost of borrowing.
Shripal Shah, Managing Director of Kotak Securities, says the new tax cuts will boost consumption which makes up 60% of India’s Gross Domestic Product (GDP).
“This should directly boost demand, help traders and businesses see higher volumes, and may even favourably impact next quarter’s [corporate] earnings. It also carries the potential to ease inflation,” he says.
While lower GST rates are expected to spruce up India’s economy, states that rely heavily on this tax revenue are worried about shortfalls.
But some economists argue that these losses will be mitigated by improved consumption, which could boost growth.
They could also act as a buffer against the impact of US President Donald Trump’s punishing 50% tariffs on India.
Trump has slapped India with 25% tariffs plus a 25% penalty for buying Russian crude. He has threatened to increase “sanctions” further if India does not stop purchasing oil from Moscow.
GST, which was introduced eight years ago, replaced a maze of indirect taxes to simplify compliance and the cost of doing business.
But while the nationwide uniform levy helped boost India’s revenue, experts have criticised it for being complicated with too many thresholds and exemptions, and have repeatedly called for it to be revamped.
The revised GST structure does away with many of these complications.
During his Independence Day speech on 15 August, Prime Minister Narendra Modi had promised a “massive tax bonanza” for the common man and small businesses, and the GST rate cuts are being seen as his government delivering on this promise.
In a post on X, Modi said that the GST reforms would benefit the farmers, India’s middle-class, women and youth and make it easy for small traders to do business.
Source: BBC
- Agencies
