AA Edit | Will Move To Cut GST Rates Trigger Consumption Boom?

The BJP government’s proposal to cut GST rates is long overdue and could boost domestic consumption, easing the impact of global economic uncertainty on India. When the Goods and Services Tax (GST) was rolled out in 2017 as part of a major indirect tax reform, the Central and state governments brought 1,300 goods and 500 services under its ambit to end the incidence of “tax on tax.” However, the initiative was criticised for being too complex due to its multiple tax slabs — five per cent, 12 per cent, 18 per cent and 28 per cent — along with a special sin tax on some items.

After eight years, the government has proposed reducing the number of tax slabs to two — five per cent and 18 per cent — along with a 40 per cent special rate on a select few items. Though the official draft is yet to be released, indications are that 90 per cent of the goods in the 28 per cent and 12 per cent categories will shift to 18 per cent and five per cent respectively. This could translate into at least seven to 10 per cent savings for consumers, depending on the product purchased.

Products in the 28 per cent bracket — which make up 19 per cent of manufactured goods — include non-essential FMCG items such as chewing gum and pan masala, as well as big-ticket consumer durables and cars. Moving them to 18 per cent could reduce prices by about 10 per cent.

Goods currently taxed at 12 per cent — such as semi-essentials like frozen meat products, butter, cheese, namkeen, sauce, spoons, forks, tooth powder, mobile phones, apparels, and hotel accommodation among others — will shift to the five per cent bracket, enabling savings of at least seven per cent.

The biggest savings in absolute terms would be for those planning to purchase a small car priced between Rs 6 lakh and Rs 15 lakh. A 10 per cent lower tax rate would reduce prices by Rs 60,000 to Rs 1,50,000. Other products could see an average saving of around eight per cent, meaning a family with a Rs 1-lakh monthly expenditure could save up to Rs 8,000 per month.

Analysts believe that lowering GST could disproportionately affect state governments, as indirect tax is their major revenue source and the Centre does not share income from cesses and surcharges. This could weaken states’ capacity to spend independently without seeking support from the Centre.

Overall, the current rejig of GST slabs, along with the previously announced income-tax rationalisation, could leave more money in people’s hands and theoretically boost consumption, triggering a virtuous cycle. While the government’s measures are well-intentioned and timely, the big question remains: Will these moves compensate for years of stagnant private-sector salaries? Will they instil enough confidence for people to borrow, spend, and revive animal spirits in the economy? Will these measures inspire confidence in the private sector to spend to create new capacities and hire more people? It is a $4-trillion question, which is waiting to be answered.