The GST Council announced an early Diwali gift for Indian consumers by significantly cutting rates on most fast-moving consumer goods and consumer durables. The aim is to boost consumption, which has been subdued despite the income tax relief announced in the Budget 2025.
Exceeding expectations, the GST Council, chaired by Finance Minister Nirmala Sitharaman, on Wednesday moved most items from 12 per cent or 18 per cent bracket to 5 per cent bracket. The Council abolished the current rate structure of four rates and announced the two rates of 5 per cent and 18 per cent. The 12 per cent and 28 per cent slabs have been scrapped.
The new GST rates will be effective from September 22 this year.
Can GST boost consumption?
In a broad sense, lower tax rates will make a range of consumer items cheaper, which should boost consumption. From toothpaste to ACs, medicines, and small cars, the government has announced relief on major items that consumers spend a significant portion of their income on. Therefore, it makes sense to expect consumers to spend more as they will have more disposable income now.
“We remain constructive on the uptick in consumption demand in the economy as multiple policy levers turn favourable for the first time in a decade,” said Garima Kapoor, Economist and Executive Vice President, Elara Capital.
“The revolutionary GST reform has come better than expected, benefiting a wide spectrum of sectors. The ultimate beneficiary is the Indian consumer who will benefit from lower prices,” said VK Vijayakumar, Chief Investment Strategist, Geojit Investments.
“The potential big boost to consumption in an economy that is already in growth momentum will be big and may surprise on the upside. This GST reform, along with the fiscal and monetary stimulus already provided, can trigger a virtuous cycle and boost India’s growth to 6.5 per cent in FY26 and perhaps 7 per cent in FY27 with impressive gains in corporate earnings,” Vijayakumar said.
Moreover, reduced cost of machinery and cheaper fertiliser mean lower input costs for farmers. This will boost rural consumption and is a big positive considering the healthy monsoon this year.
“Overall, GST reforms seem to be a positive economic and structural impact, which will see the green shoots, once these are effective and implemented. Relief from GST rate cuts on essential goods and inputs strengthens input affordability, encourages mechanisation, and supports productivity gains—particularly important because agricultural output remains GST-exempt, offering no input tax credit flow-through to farmers,” said Soumyak Biswas, Partner, Food & Agribusiness, Management Consulting, BDO India.
Can GST reforms offset the impact of Trump’s tariffs?
While many may think that the GST reforms are aimed at nullifying the impact of 50 per cent US tariffs on Indian goods, the government said it had been working on them for over a year and that they are not a policy response to Trump tariffs.
“We’ve been working on GST rate rationalisation for 1.5 years…. None of this has to do with tariffs,” said Finance Minister Nirmala Sitharaman.
The main idea behind the GST reforms was to simplify the taxes and boost consumption by giving relief to consumers.
However, it is also true that these reforms, along with the RBI’s rate cuts and income tax relief, will be a significant positive for economic growth. This could potentially offset the impact of tariffs on Indian goods imposed by US President Donald Trump.
“GST rate changes, along with RBI’s rate cuts, income tax rebates announced in FY26 budget and easing inflation are all levers for a consumption uptick in the economy. We expect GST-related demand boost to add 100 to 120 bps to the GDP growth over the next 4-6 quarters, thereby nullifying the negative impact of higher tariffs on exports to the US,” said Kapoor.
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