Prime Minister Narendra Modi's most profound tax cuts in eight years will strain government revenues, but they are being praised by businesses and political pundits who believe they will help his image in an ongoing trade war with Washington.
In the most significant tax overhaul since 2017, Modi's government announced sweeping changes to the complex goods and services tax (GST) regime on Saturday, making daily necessities and electronics cheaper beginning in October, benefiting both consumers and companies such as Nestle, Samsung, and LG Electronics.
Key Highlights
- Sweeping GST cut to 5%, phasing out 28% slab, may cost $20B annually yet boost GDP.
- Move expected to improve market sentiment and political standing, especially ahead of Bihar elections.
At the same time, in his Independence Day speech on Friday, Modi urged Indians to consume more domestically produced goods, echoing calls from many of his supporters to boycott U.S. products after Donald Trump raised tariffs on Indian imports to 50% as of August 27.
Given that GST is a significant revenue generator, the tax cut plan is not without costs. According to IDFC First Bank, the cuts will increase India's GDP by 0.6 percentage points over 12 months while costing the state and federal governments $20 billion per year.
However, Rasheed Kidwai, a fellow at the Observer Research Foundation in New Delhi, believes it will boost weak stock market sentiment and provide political benefits to Modi ahead of a critical state election in Bihar.
"In contrast to income tax cuts, which only affect 3%-4% of the population, GST reductions will affect everyone. "Modi is doing this because he is under a lot of pressure from US policies," Kidwai explained. "The move will also benefit the stock market, which has become politically important due to its large number of retail investors."
India implemented a major tax system in 2017 that merged local state taxes into a new, nationwide GST to unify its economy for the first time. However, the largest tax reform since India's independence has been criticized for its complex design, which taxes products and services in four slabs: 5%, 12%, 18%, and 28%.
Also Read: GST Overhaul to Stimulate Consumption and Boost Tax Compliance: Centre
Last year, India announced that caramel popcorn would be taxed at 18% but salted popcorn at 5%, prompting criticism as a glaring example of GST's complexities.
Under the new system, India will eliminate the 28% slab, which includes automobiles and electronics, and move nearly all of the 12% category items to the lower 5% slab, benefiting many more consumer goods and packaged foods.
According to government data, the 28% and 12% tax slabs combined accounted for 16% of India's annual GST revenue of approximately $250 billion last fiscal year.
