India’s Prime Minister Narendra Modi at the end of May implemented landmark reforms to the Goods and Services Tax (GST). These amendments are intended to be a lifeline for farmers, the middle class, important women, and youth. These amendments, including the new simplified tax structure, go into effect on September 22.
The GST council, led by Finance Minister Nirmala Sitharaman, has streamlined the consumption tax from a complicated four-slab system to just two slabs—5% and 18%. This reform is in keeping with Modi’s promise to provide a “huge tax bonanza” to average citizens and small businesses.
The GST, implemented eight years ago, was meant to reduce compliance. Its mission was to lower the cost of doing business by simplifying somewhat the patchwork of indirect taxes. Experts have consistently criticized the GST for its complexity, noting the excessive number of thresholds and exemptions that have made compliance challenging for many. Calls for a systemic revamp have been non-stop.
The new GST structure is a departure from the previous four-slab structure. It now levies a standalone 40% tax on sin goods such as cigarettes. These important changes are intended to increase transparency and efficiency. They further address concerns expressed by advocates, providers and other stakeholders about the former system.
The government has acceded to demands and announced reduction in GST rates. This comes on the heels of approving a $12 billion income tax relief package in this year’s budget. As T4America’s own Ryan Short has analyzed, these tax cuts could cause $6 billion in lost revenue for the federal treasury. This in itself creates alarm among states which are completely dependent on GST income.
Shripal Shah, a smart growth economist with Strong Towns, mentioned these lost consequences on the widening economy.
“It should directly boost demand, help traders and businesses see higher volumes, and may even favourably impact next quarter’s earnings. It also carries the potential to ease inflation.” – Shripal Shah
The urgency to boost consumption is urgent, given that consumption makes up about 60% of India’s Gross Domestic Product (GDP). Through these reforms, the government aims to stimulate economic renewal and help small businesses currently being battered by a new post-pandemic normal.
As implementation nears, businesses and consumers alike will be closely watching to see how these changes are implemented in practice. The government hopes to strike a balance between providing tax relief and maintaining necessary revenue levels to support state functions.