Reduced GST rates and increased domestic demand may serve as protective barriers to India from potential impacts of Trump's tariffs.
The future of India's Goods and Services Tax (GST) remains a topic of much discussion, with the date for the next GST Council meeting yet to be announced. Amidst calls for GST cuts to lower prices of essential goods and stimulate demand, some experts advocate for GST rate rationalization as a more effective solution.
Garima Kapoor, a notable economist, believes that targeted measures such as subsidies or rebates could be more successful in mitigating the loss of export orders than GST cuts. On the other hand, Ajay Bagga, a prominent business leader, argues that GST cuts are essential to help lower the prices of petrol, diesel, cooking gas, and aviation fuel.
DK Srivastava, Chief Policy Advisor at EY, supports both views, suggesting that rate reduction and rate rationalisation should be given priority. He proposes a new generation of GST reforms, including a reduction in the number of GST categories and a lower effective GST rate.
The potential benefits of GST rate rationalization are numerous. Simplifying the tax structure, correcting inverted duty structures, and reducing tax rates on everyday and essential goods can make domestic goods more competitive, both locally and internationally. This, in turn, can help exporters by lowering their effective tax costs and reducing blocked working capital.
Lower GST rates on consumer durables, two-wheelers, and essential items can significantly stimulate domestic demand, mitigating the impact of external trade uncertainties such as tariffs imposed by the US. By boosting sectors like Fast-Moving Consumer Goods (FMCG), consumer durables, automobiles, and agriculture, GST rate rationalization can support sustained economic growth, even in the face of global uncertainties.
However, GST rationalization is not without its challenges. Transitional difficulties, such as managing anti-profiteering compliance and balancing the trade-off between revenue neutrality and demand stimulation, must be carefully considered. There is also the risk of revenue loss if tax rate cuts are too steep without broadening the tax base or improving compliance. Inflation control and implementation complexities are additional factors that need careful consideration.
Some sectors previously benefiting from certain slabs might face challenges in adjustment, requiring a phased and consultative approach to avoid disruptions or classification disputes. Despite these challenges, GST rate rationalization is expected to support India's economic resilience and the Atmanirbhar Bharat mission by promoting tax efficiency, boosting domestic consumption, and insulating exporters from external shocks such as US trade tariffs, provided it is implemented cautiously with sector-wise considerations.
The GST Council is mandated to meet at least once every quarter of the financial year, with a typical 21-day notice period observed for meetings. The last GST council meeting took place on December 21, 2024. In the meantime, the Indian government has increased the Income Tax threshold, providing more money to citizens.
Srivastava also suggests diversifying exports to countries beyond the US and strengthening domestic consumption and production as key strategies for India's economic growth. He further proposes using demerit rates for specified demerit goods and a non-rebatable excise duty/VAT rate for polluting inputs and outputs.
As the GST Council prepares for its next meeting, the debate on GST rate rationalization continues, with experts emphasizing its potential to boost domestic consumption, stimulate economic growth, and insulate exporters from external shocks. The challenge lies in implementing this reform cautiously, with sector-wise considerations, to ensure its success.
- Garima Kapoor suggests that subsidies or rebates could be more successful in mitigating the loss of export orders than GST cuts, as targeted measures may have a more significant impact on the economy.
- DK Srivastava, the Chief Policy Advisor at EY, proposes a new generation of GST reforms that prioritize rate reduction and rate rationalization, aiming to simplify the tax structure, correct inverted duty structures, and lower effective tax costs for exporters.
- Lower GST rates on consumer durables, two-wheelers, and essential items can significantly stimulate domestic demand, helping to offset the impact of external trade uncertainties such as tariffs imposed by the US.
- The GST Council is mandated to meet at least once every quarter of the financial year, with the challenge being to implement GST rate rationalization cautiously, considering sector-wise impacts, to ensure its success.
- Srivastava also proposes diversifying exports to countries beyond the US and strengthening domestic consumption and production as key strategies for India's economic growth, emphasizing the potential of GST rationalization to support tax efficiency, boost domestic consumption, and insulate exporters from external shocks.
