India Slashes Taxes to Boost Consumption and Counter US Tariffs
In a bold move, India has taken steps to cut taxes on a wide range of goods in an effort to stimulate consumption and offset the potential impact of hefty tariffs imposed by the US.
The country’s Finance Minister, Nirmala Sitharaman, announced on Wednesday that the Goods and Services Tax (GST) panel has streamlined the consumption tax into two main slabs – 5% and 18%, eliminating the previous four-slab structure. Additionally, there will be a separate 40% tax on items such as cigarettes.
Under the new tax regime, essential items like food products, school supplies, and insurance will become more affordable, while imported liquor and luxury cars are expected to see price hikes.
The stock markets reacted positively to the news, with analysts predicting potential revenue losses of up to $6 billion for the government.
The revised tax rates are set to take effect on 22 September, just in time for India’s festive season, when sales of electronics and household appliances typically soar. The reduced prices are anticipated to further boost consumer spending.
These tax cuts follow a $12 billion income tax relief package announced earlier this year and coincide with the central bank’s efforts to lower borrowing costs.
Shripal Shah, Managing Director of Kotak Securities, believes that the tax reductions will have a significant impact on consumption, which accounts for 60% of India’s GDP. He expects increased demand, higher business volumes, and a potential easing of inflation.
While the lower GST rates are likely to stimulate India’s economy, concerns have been raised by states heavily reliant on GST revenue. However, economists argue that improved consumption could drive growth and offset these losses.
The tax cuts may also serve as a protective measure against the effects of President Donald Trump’s stringent tariffs on India, including a 50% levy on certain goods.
Introduced eight years ago, GST replaced a complex web of indirect taxes to simplify compliance and reduce business costs. Despite some criticism for its complexity, the latest GST reforms aim to address these challenges.
Prime Minister Narendra Modi, in his Independence Day address, promised a “massive tax bonanza” for the people and small businesses. The recent GST rate cuts are seen as a fulfillment of this pledge, with Modi highlighting the benefits for farmers, the middle class, women, youth, and small traders.
