What actually changed (and what’s been proposed) Independence Day (Aug 15) signal:
The PM announced “next-generation GST reforms by Diwali” to lower the tax burden on households and simplify the system; Finance has already sent a rationalization proposal to the GST Council’s GoM (rate rationalization, fixing inverted duties, fewer disputes).
GST structure taking shape: Multiple credible reports outline a shift from four slabs to two main slabs (5% and 18%), moving most 12% goods to 5%, and migrating the bulk of 28% goods to 18%, while adding a higher “demerit” rate (~40%) for a short list (e.g., tobacco). Auto GST cuts (e.g., small cars from 28%→18%) have been discussed publicly and lauded by industry. Direct taxes refreshed: Parliament advanced the Income-tax (No. 2) Bill, 2025 to replace the 1961 Act, simplifying slabs and compliance (higher 87A rebate cap, clearer new-regime slabs, AMT removed for LLPs, and procedural easings). I
Revenue impact: Analysts cited by Reuters estimate ~US$20bn lower GST collections initially as rates fall, implying a short-term fiscal pinch before growth/dividend effects kick in.
How these tax moves can transform the economy
Transmission mechanics (the growth model)
Consumption boost: Lower GST on durables (autos, appliances) + cheaper daily-use items increases real disposable income; price elasticity in these categories is high, so volumes should respond quickly (festive multiplier).
Investment & formalization: A simpler GST and a modern Income-tax Act cut compliance costs, reduce disputes, and improve cash flows (especially for MSMEs and LLPs after AMT removal), raising the effective after-tax IRR of new projects.
Net-exports channel: Lower indirect-tax content in goods + fewer inverted duties improves unit cost and price competitiveness—helpful where the US tariff headwinds exist.
Macro uplift (stylized): If fully implemented by FY26, the package plausibly adds +0.5–0.8 percentage points to real GDP growth for 2–3 years, fading to +0.2–0.3 pp as one-offs normalize (based on typical pass-through seen after large indirect-tax rationalizations in peer markets). (This is a modelled range; actual outcomes will vary with global demand and state-level adoption.)
Cushioning US tariff friction
India cannot change US tariffs unilaterally, but it can offset their bite:
Lower domestic tax content → better export pricing headroom.
Fixing inverted duty structures → fewer input tax blockages in export value chains (electronics, textiles, toys).
Sectoral deals: The new cost base strengthens India’s hand in reciprocal, sector-specific arrangements (e.g., autos/EV parts, electronics), while broader reforms signal reliability to US buyers/investors. (Press and industry commentary already link GST changes to competitiveness gains.)
What it means for people and businesses
Households: Cheaper durables and many FMCG items; higher small-ticket savings via the new income-tax slabs/rebate; smoother billing (fewer rates). MSMEs/Startups/LLPs: Simpler code, no AMT for LLPs, clearer refund pathways and reduced TDS frictions improve cash flow and lower the compliance tax.
Large industry: Reduced inverted duties, clearer rate stability → fewer disputes, better capex visibility.
Sector-by-sector outlook (10 years; illustrative)
Agriculture & food chains (GVA +0.2–0.3 pp by FY30): Lower GST on inputs/packaged foods and fewer classification disputes accelerate formalization of agri-processing/logistics; FPOs and cold-chain investments become more viable.
Manufacturing (share of GDP +3–4 pp by FY35): Autos, white goods, and electronics gain from rate cuts and cost clarity; pairing GST 2.0 with PLI can push scale and exports. Industry leaders already argue competitiveness improves.
Professional & financial services: Lower friction in the new Act, higher 87A rebate, and dispute-light provisions can raise compliance and widen the base; LLPs benefit first.
Technology & digital economy: Simpler indirect taxes for SaaS/digital services reduce classification issues; clearer direct-tax rules support cross-border contracting and productization.
International trade: Lower embedded taxes help offset US tariff pressure; use zero-rating and faster GST refunds for exporters to amplify gains.
Education & skills: With consumer prices lower and compliance simpler, room opens for targeted tax credits or 0% GST on priority skilling programs (policy design dependent), improving employability as AI adoption accelerates.
Risks & guardrails
Short-term fiscal gap: The ~US$20bn GST hit must be backfilled via buoyancy, sin-rate (40%) on demerits, and compliance tech (e-invoicing expansion).
State finances & GST Council consensus: Smooth transition requires compensation design and staged roll-out.
Execution drift: Benefits hinge on timelines (“by Diwali”) and the final rate list; drift dilutes growth impulse.
Policy recommendations to maximize impact
Lock the two-slab map early, publish a negative list for the 40% demerit band, and issue binding advanced rulings to cut disputes.
Clear inverted duties in export-heavy chains (electronics, textiles, toys) and time-bound 90-day GST refunds for exporters.
Direct-tax glidepath: Keep the simplified new-regime slabs stable for 3–5 years; expand the 87A relief threshold with inflation; maintain LLP AMT removal.
US trade pragmatism: Use the cost relief to negotiate sectoral tariff understandings and mutual recognition (testing/standards) while diversifying export markets.
MSME cash-flow tools: Expand invoice-discounting/TReDS uptake and GST e-invoicing for the long tail to raise compliance and credit access.
10-year outlook (high-level, scenario bands)
Real GDP growth: Baseline +0.5–0.8 pp (FY26–FY28), tapering to +0.2–0.3 pp (FY29–FY31); cumulative real GDP +3–4% vs. no-reform path by FY31 (assumes timely rollout, stable oil, and steady global demand).
Manufacturing share: ~17% → 20–21% of GDP by FY35 (paired with PLI/logistics build-out).
Export growth: +2–3 pp over baseline for goods most affected by GST cuts (autos/auto parts, appliances, electronics) once global conditions normalize.
Inflation: One-off disinflation of 15–50 bps in items receiving GST cuts; neutral thereafter.
Fiscal: Near-term central + state deficit +0.2–0.4% of GDP, recouped by buoyancy/compliance over 2–3 years.
Bottom line
If New-GST and the new Income-tax law land on time and cleanly, India gets a simpler, cheaper tax stack that boosts consumption now, investment next, and competitiveness throughout—blunting US-tariff pressure while improving daily life for households and MSMEs. The reform is credible, the direction is right; execution in 2025–26 will decide how much of the 10-year dividend India captures.
Source : Navabharath.in