India has slashed taxes on hundreds of goods in a bid to spur consumption and cushion the economy against the impact of steep US tariffs.
Finance Minister Nirmala Sitharaman announced on Wednesday that the Goods and Services Tax (GST) Council had simplified the tax system, replacing the earlier four-tier structure with two slabs—5% and 18%. A separate 40% levy will apply to “sin goods” such as cigarettes.
Items set to become cheaper include food products, school supplies, and insurance premiums, while imported liquor and luxury cars will be more expensive.
The move sparked a rally in stock markets, though analysts warn that the lower rates could cost the government up to $6 billion in revenue. The new GST rates will take effect from 22 September, coinciding with India’s festive season, a period that typically sees a surge in sales of electronics and household appliances.
The tax cuts follow a $12 billion income tax relief package announced in the budget earlier this year and come as the Reserve Bank of India has started lowering borrowing costs.
Shripal Shah, Managing Director of Kotak Securities, said the measures would directly boost demand.
“Consumption accounts for 60% of India’s GDP. These cuts should help traders and businesses increase volumes, potentially lift corporate earnings next quarter, and may even help ease inflation,” he noted.
While the revised GST structure is expected to invigorate the economy, some states that rely heavily on GST revenue have expressed concerns about potential shortfalls. However, economists argue that the resulting rise in consumption could help offset losses.
The decision also comes as India faces economic headwinds from the US. President Donald Trump has imposed 25% tariffs and an additional 25% penalty on Indian imports over New Delhi’s continued purchase of Russian crude, warning of further sanctions unless the practice stops.
Introduced eight years ago, GST replaced a patchwork of indirect taxes, simplifying compliance and reducing the cost of doing business. However, it has often been criticized for its complexity and multiple exemptions. The revised system is expected to address many of these shortcomings.
Prime Minister Narendra Modi had promised a “massive tax bonanza” for the common man and small businesses during his Independence Day speech on 15 August. On X, he said the GST reforms would benefit farmers, the middle class, women, and youth, while easing operations for small traders.
