In another tactical measure to attract domestic demand and shield its economy against the crushing blow of high U.S. import levies that could drive billions of dollars in exports off, India has introduced sweeping tax reductions on hundreds of consumer goods, including soaps to compact cars. This all-inclusive fiscal policy is one of the biggest economic policy reactions to the rising trade friction as New Delhi tries to defend its status as the fourth-largest economy in the world.
GST Council gives a green light to significant tax restructuring
According to Yahoo News Canada, India will reduce taxes on hundreds of consumer goods, such as air conditioners to small cars, to boost local consumption, its government said Wednesday, as New Delhi tries to cushion its economy against the impact of high U.S. importation tariffs.
The announcement follows the introduction of new tariffs last month by U.S. President Donald Trump that place a portion of the shipments that New Delhi could make to its largest market in the world at risk. The all-powerful government panel has approved the reduced goods and services tax, according to Finance Minister Nirmala Sitharaman, who told a news conference late Wednesday.
A complex system is substituted with a simplified two-tier structure
According to StratNews Global, the indirect tax system, which had four levels (5 percent, 12 percent, 18 percent, and 28 percent), was simplified to a two-tier system of 5 percent and 18 percent, redesigned by the GST Council under the chairmanship of Union Finance Minister Nirmala Sitharaman. In line with this development, a special 40% slab has been developed in the sin products and high-end luxury products.
The new rates will come into effect on September 22, which is the beginning of the Navratri festival season. Most of the goods will be taxed at a lower rate, but there is a special rate of 40 percent on some goods, including luxury cars, cigars, and cigarettes.
Modi celebrates reform as an economic necessity
The rationalisation of rates is not the only reform. It also relates to structural enhancement, comfort of living, and simplification of business interaction with GST, Sitharaman said in a press briefing late on Wednesday, underlining the all-encompassing character of these changes. The lowering of the taxes is one aspect of the larger scheme by Indian Prime Minister Narendra Modi to cushion the economy against the blow of U.S. tariffs, projected to affect an estimated $48.2 billion of Indian exports.
A lot of relief is given to the automotive sector
Small cars are among the largest beneficiaries, and the segment is critical to the automotive market in India. Motor vehicles with a petrol engine of no more than 1,200 cc and a diesel engine of no more than 1,500 cc will be taxed at 18%, as opposed to 28% previously. There is also a major change in motorcycles. Engine-powered two-wheelers with engines of up to 350 cc will be moved to a new tax of 18%, rather than 28%, and larger bikes will be reclassified at 40. The rates on construction materials like cement are also reduced to 18 per cent.
A further 25 percent tariff on Indian products was introduced by Trump last month, following its continued purchase of Russian oil, which has led to total tariffs of 50 percent, and worsened relations between the two largest democracies in the world. It is estimated that the net GST rationalisation cost will be ₹48,000 crore per year.
The entire tax reform in India is a calculated response to American pressure on trade that demonstrates that India is determined to remain economically growing by fostering internal demand. India is striving to balance external trade challenges by streamlining its GST system and lowering rates on basic items, as well as increasing its domestic market resiliency and consumer buying capacity.