The Indian government’s move on Wednesday to formally reduce the goods and services tax on a variety of items is expected to spur consumption and ease the impact of U.S. tariffs.
The GST reductions and an earlier round of income tax cuts in April should boost consumer demand and corporate profits in the near and medium-term, Citi Research said in a note Thursday.
Indian households are expected to get a boost in spending power equal to 0.7% and 0.8% of GDP in the fiscal year ending March 2026, Citi economists said, while the GST cuts could reduce inflation by 1.1 percentage points if the full tax cut is passed on to consumers.
India’s GST, which was criticized in the past for being complicated, was simplified to a two-rate structure of 5% and 18%, instead of the current four slabs. An additional 40% tax on “super luxury” and “sin” goods such as cigarettes and high-end cars was also introduced.
These tax cuts, which Indian Prime Minister Narendra Modi first mooted in August on the country’s Independence Day, come at a time when Indian exports to the U.S. are facing 50% tariffs. India’s largest exports to the U.S. include textiles, gems and jewelry, as well as seafood, which are expected to be the worst affected.
The tariffs could affect the Indian economy by 0.6 percentage points, but “strong domestic consumption” could cushion the impact, Goldman Sachs said in a note Monday.
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While India’s domestic consumption has been weak since the “revenge shopping phenomenon post-Covid ended,” the country could easily absorb the impact of the U.S. tariffs if these tax cuts lead to a domestic consumption boom, said Pramod Gubbi, founder of Mumbai-based portfolio management fund Marcellus Investment Managers.
India’s domestic consumption — largely driven by private or household spending — accounts for over 60% of GDP in fiscal year 2025, close to other developed economies like the U.S. and the U.K., making it less dependent on exports.
If domestic consumption picks up, sluggish private sector capital investment could also rebound, starting a “virtuous economic cycle,” Gubbi said.
The GST reductions are “definitely going to boost consumption,” Maulik Manankiwala, partner at BDO India, told CNBC’s “Inside India.”
The new tax rates will be effective from Sept. 22, coinciding with the start of the festive season in India. GST has been cut to zero or 5% from 12% or 18% on a range of packaged food items and fast-moving consumer goods.
Air-conditioners, television sets, dishwashing machines, small cars, and motorcycles equal to or less than 350-cc will attract GST of 18%, down from 28% earlier.
The government has also cut taxes completely on individual life and health insurance policies as well as a few life-saving drugs.
“The GST rate cuts come at the right time, which is just ahead of the festive season and against the backdrop of US tariff tiffs,” said Shripal Shah, MD and CEO of Mumbai-based Kotak Securities.
Lower taxes on essentials, consumer products and automobiles will leave households with more money in hand, Shah said, which he said “should directly boost demand, help traders and businesses see higher volumes” and boost corporate earnings next quarter.
The tax cuts also provide relief to the textile industry, which has been one of the hardest hit due to the U.S. tariffs. The GST for textile industry goods was also simplified and reduced from 12% to 5% — a long-standing demand of the industry.
But all these goodies will come at a cost. The GST cuts will mean a net revenue loss of 576 billion Indian rupees, or 0.16% of GDP for the fiscal year, according to Citi.
Source: CNBC