^{Photo: The Hindu BusinessLine}

Simplifying India’s GST Structure
India has unveiled a major overhaul of its Goods and Services Tax (GST), streamlining it into a two-rate structure of 5% and 18%—down from the previous four slabs. In addition, a steep 40% levy has been introduced on “super luxury” and “sin” goods such as cigarettes and premium cars. The government hopes this simplification will make taxation easier for businesses while boosting household spending power.

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Impact on Consumption and Inflation
According to Citi Research, the combined impact of the GST cuts and earlier income tax reductions could lift household spending by up to 0.8% of GDP in the fiscal year ending March 2026. Economists also estimate that inflation could fall by 1.1 percentage points if businesses pass on the full tax reduction to consumers. With private consumption already accounting for more than 60% of India’s GDP, the measures could spark a broad-based recovery in demand.

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Relief for Consumers and Key Industries
The changes come into effect on September 22, aligning with India’s festive season—a period that traditionally drives strong sales of consumer goods, automobiles, and household products. Essential packaged foods and fast-moving consumer goods now face GST rates as low as 0% or 5%, while items such as air-conditioners, small cars, motorcycles under 350cc, dishwashers, and television sets will now attract 18% instead of the previous 28%.
Life and health insurance premiums, along with select life-saving drugs, have also been made tax-free, directly easing household financial burdens. The textile industry, one of the hardest-hit sectors from U.S. tariffs, welcomed the cut from 12% to 5%, a move expected to revive domestic demand and exports.

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Balancing Tariffs and Domestic Demand
The reforms arrive at a time when Indian exports to the U.S.—including textiles, seafood, and gems—are being squeezed by tariffs of up to 50%. Goldman Sachs estimates that these tariffs could shave 0.6 percentage points off India’s growth. However, strong local demand, fueled by the GST cuts, may act as a cushion against global trade headwinds. Analysts suggest this could spark a “virtuous cycle” where higher consumption leads to improved business confidence and renewed private investment.

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Revenue Trade-Offs and Government Strategy
While the measures are designed to energize the economy, they come at a fiscal cost. Citi estimates a revenue loss of 576 billion rupees (around $6.9 billion), equivalent to 0.16% of GDP for the year. Still, many economists argue the short-term revenue hit could be outweighed by the longer-term boost in demand, higher volumes for businesses, and improved corporate earnings.

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Looking Ahead
Prime Minister Narendra Modi first hinted at these reforms during his Independence Day address, signaling a policy shift toward strengthening domestic demand. With the festive season approaching, reduced taxes on essentials and consumer products are expected to put more money directly into households’ hands. If the consumption surge materializes, it could not only offset tariff-related losses but also lay the foundation for stronger growth in 2025 and beyond.