India Slashes GST Rates to Boost Consumption, Simplify Tax Structure
New Delhi – India has announced sweeping cuts in goods and services tax (GST) rates, aiming to make the system simpler and give a push to consumer demand.
Finance Minister Nirmala Sitharaman, who chairs the GST panel comprising state finance ministers, said late Wednesday that the council has approved a streamlined two-rate structure of 5% and 18%, down from the existing four-tier system.
Everyday items such as toothpaste and shampoo will now attract just 5% tax instead of 18%, while small cars, air conditioners, and televisions will be taxed at 18% instead of 28%. In a major relief, GST will also be completely removed from individual life and health insurance policies.
The changes will take effect from September 22, coinciding with the start of Navratri. However, the cuts are expected to cost the central and state governments an estimated 480 billion rupees ($5.49 billion) in revenue.
Despite the hit, experts believe the move will fuel spending. “The consumption boost instead of the GST rate rationalisation will more than neutralise any possible revenue impact,” said Soumya Kanti Ghosh, chief economist at SBI, adding that the effect on the fiscal deficit would be “almost insignificant or even positive.”
At the same time, the panel has introduced a steep 40% tax on “super luxury” and “sin” goods like cigarettes, large cars with engine capacity above 1,500cc, and carbonated drinks.
The reforms are expected to benefit FMCG players such as Hindustan Unilever and Godrej, consumer electronics makers like Samsung, LG, and Sony, and automakers including Maruti, Toyota, and Suzuki.
The push comes after Prime Minister Narendra Modi urged for greater self-reliance and pledged to reduce GST rates by October in response to U.S. tariffs of up to 50%. Following Wednesday’s announcement, Modi said the “wide-ranging reforms will improve the lives of our citizens and ensure ease of doing business for all, especially small traders and businesses.”
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