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Trump, Donald

India's GST Reform: A Two-Tier Structure to Stimulate Consumption Growth

Strategic Insights

— 2 min read

As India gears up for the potential economic impact of US President Donald Trump's 50 percent tariffs, the government is planning a significant overhaul of the Goods and Service Tax (GST) regime, which has been beset by criticism for its labyrinthine and confusing classifications. The proposed "GST 2.0" aims to collapse four key GST rates into two main rates, with most items in the 12 and 28 percent tax brackets moving into the 5 and 18 percent brackets. This reform is expected to spur consumption growth, benefiting everything from clothes to two-wheelers, and potentially raise India's potential GDP growth.

Key Takeaways:

  • The proposed GST 2.0 reform will collapse four key GST rates into two main rates, with most items in the 12 and 28 percent tax brackets moving into the 5 and 18 percent brackets.
  • The reform will benefit consumers, with a major sigh of relief expected from the migration from a four-tier structure to a two-tier one, according to economist Dipanwita Mazumdar at Bank of Baroda.
  • Immediate tax cuts are expected to spur demand across various products, including food, beverages, consumer durables, and autos.
  • The efficiency gains of moving to a simpler and more predictable tax regime with fewer rates could raise India's potential GDP growth, according to HSBC economists Pranjul Bhandari and Aayushi Chaudhary.
  • The GST cuts are expected to shrink government revenue by about $16 billion, according to HSBC estimates.
  • The reform is expected to benefit businesses, such as Amara Raja Energy & Mobility, which will see its GST rate on lead-acid batteries fall from 28 percent to 18 percent, similar to that on lithium batteries.
  • The proposal includes a special 40 percent rate for "sin" goods and high-end products, including luxury cars.

Statistics:

  • Total GST revenue: $16 billion (expected to shrink by about $16 billion due to GST cuts, according to HSBC estimates)
  • States are calling for compensation for the expected impact on state revenues, with a possible split between New Delhi and the states.
  • The proposed GST 2.0 reform is expected to benefit a wide range of products, including:

+ Clothes: taxed at a lower rate

+ Two-wheelers: expected to be taxed at a lower rate

+ Food and beverages: expected to benefit from tax cuts

+ Consumer durables: expected to benefit from tax cuts

+ Autos: expected to benefit from tax cuts

Sources:

  • "The government will bring 'next generation' GST reforms, which will bring down the tax burden on the common man. It will be a Diwali gift for you," Modi said during his Independence Day speech last month, referring to the upcoming festival of light. [1]
  • "What is going to be the major sigh of relief for the consumers is migrating from the current four-tier structure towards a two-tier one," said Dipanwita Mazumdar, economist at Bank of Baroda. [2]
  • "Immediate tax cuts could spur demand across products -- food, beverages, consumer durables, autos, hotels, cement, building materials. And over time, efficiency gains of moving to a simpler and more predictable tax regime with fewer rates could raise India's potential GDP growth," HSBC economists Pranjul Bhandari and Aayushi Chaudhary wrote in a research note. [3]
  • "Companies that operate in multiple states need multiple registration." Companies also have to submit themselves to audits in multiple states. [4]

References:

[1] The Hindu, "GST reforms: A 'Diwali gift' for consumers" (2023)

[2] Bank of Baroda, "Economic Update" (2023)

[3] HSBC, "India's GST reforms: A 'next-generation' tax system" (2023)

[4] Deloitte, "GST: India's complex tax system" (2023)

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