In ‘service of goodness’: Big reforms likely in GST, to benefit common man, amid US tariff war

New Delhi: Prime Minister Narendra Modi’s latest tax cut plan is anticipated to stimulate India’s economy, albeit at a significant cost to government finances. Economists and analysts project that the modifications to the Goods and Services Tax (GST) will boost India’s GDP by 0.6 percent in the coming year but will also lead to a yearly reduction of nearly $20 billion in government revenues.

This is according to a bank research report and an international news report.

Major tax changes to reduce government income

The revamp of the GST system — the most extensive since its inception in 2017 — is viewed as a crucial reform despite its impact on government income. This move is expected to benefit consumers and major corporations while bolstering India’s stance in trade disputes with the US.

The report indicates that starting in October, essential daily items and electronic goods are set to witness price reductions, benefiting consumers and major companies such as Nestlé, Samsung, and LG Electronics.

This announcement follows the Prime Minister’s call for increased support for domestically manufactured products in his Independence Day address.

The current GST system, with its multiple slabs and odd classifications, needed reform to simplify and reduce costs for consumers.

The announcement came amidst the US imposition of hefty tariffs (50 percent) on India, effective August 27, 2025.

Many analysts and economists believe that the GST reduction will have a broader impact than income tax cuts, as only a small portion of the population pays income tax.

The tax cuts are also seen as a response to pressure from US trade policies. With more small investors participating in the markets, improving stock performance has become politically significant.

This Diwali, a double Diwali – says PM

During his address to the nation on Independence Day, the Prime Minister said thus: “This Diwali, I am going to make it a double Diwali for you. This Diwali, you fellow countrymen are going to get a very big gift. In the last eight years, we have done a big reform of GST, reduced the tax burden across the country, simplified the tax regime and after these eight years, the need of the hour is that we should review it once. We started the review by setting up a high-power committee and also held discussions with the states.”

Furthermore, he stated, “We are coming with the next generation of GST reforms; this will be a gift for you this Diwali. Taxes payable by the common man will be reduced substantially, and a lot of facilities will be increased. Our MSMEs, our small entrepreneurs, will get a huge benefit. Everyday items will become very cheap and that will also give a new boost to the economy.”

“Every family, the poor and the middle class, small and big entrepreneurs, and every trader and businessman will benefit from this,” the PM added.

Need for reform and expected rate changes

The GST system has expanded the indirect tax base to 1.52 crore businesses in eight years, fostering a more unified national market. However, the current structure has posed challenges that the proposed reforms aim to address.

The complexity of the multi-slab system presents a significant hurdle. While a single tax bracket generates substantial revenue, it complicates administrative processes without yielding a proportional financial benefit.

Special rates, such as 0.25 percent for diamonds and other valuable stones and 3 percent for jewellery, are also included in the system. Additionally, basic food items are exempt.

The government garners the highest tax collection from the 18 percent levy, constituting 65 percent of total revenues.

The 28 percent tax bracket contributes 11 percent of revenue, while the 12 percent slab accounts for 5 percent. The lowest tax slab of 5 percent on essential daily-use items contributes 7 percent of the total GST earnings for the Centre.

Overall, the 28 percent and 12 percent tax slabs were responsible for 16 percent of India’s GST earnings, which amounted to approximately $250 billion the previous year.

The changes include scrapping the 28 percent slab and shifting many products from the 12 percent category to the 5 percent bracket.

In conclusion, the GST reduction is expected to have a broader impact than income tax cuts and is viewed as a response to both domestic and international pressures.