AA Edit | New GST Regime to Boost Growth, Bring Cheer

The GST Council's decision to restructure indirect taxes into a two-tier system is expected to make the festive season more cheerful for a large section of Indians and also help the economy face the multiple challenges it confronts.

The new indirect tax regime will have two slabs — five per cent and 18 per cent — compared to the previous five per cent, 12 per cent, 18 per cent, and 28 per cent. Luxury and sin items will be taxed at a new rate of 40 per cent.

The lower tax incidence on popular commodities will help people save five to 10 per cent of their monthly expenditure on groceries and household items, and provide a major boost to job-creating sectors like FMCG, consumer durables, automobiles, and construction.

The restructured GST slabs, coupled with lower income-tax rates announced in the Union Budget, are likely to provide stimulus to the economy and could boost economic growth by 20 basis points while further softening inflation by 40 basis points — something that had become a necessity in the wake of uncertainty created by the US tariffs and falling consumption by the middle class in the country.

The GST Council has introduced a new price-based tax differential in the regime, which aims to tax two products in the same category differently based on their affordability. A garment priced below ₹2,500 will be taxed at five per cent, while those priced above will be taxed at 18 per cent.

This price-based tax differential appears to be a deliberate decision made by the GST Council to ensure that affluent individuals contribute more to the country’s growth objectives. This strategy will reap huge dividends for governments, as the sale of high-end products has been outpacing budget models in recent years, reflecting the financial strain on people from the lower middle class. This tax model, though opposed by industry players, will address the anomaly of taxing widely different income groups equally.

The introduction of a new slab for luxury and sin products is also a significant development. A higher tax on luxury products aligns with the ethos of the welfare state in India and addresses the growing demand from foreign countries to open up the Indian economy. Most foreign companies seek to tap the premium and luxury market in India, which is growing faster than the overall economy. With India entering into free trade deals, foreign companies could dominate this segment in the near term. As foreign companies do not create jobs in the country, it is apt for the government to levy higher taxes.

The inclusion of aerated drinks containing added sugar, and caffeinated and non-alcoholic beverages in the sin product category is a timely development. Sugary and caffeinated drinks have been adversely affecting people’s health. A higher incidence of tax may not deter people from buying them, going by the inelastic demand for cigarettes and alcoholic drinks. However, the higher tax rate could at least initiate a greater conversation in society about the ill effects of sugary beverages.