Can a better and simpler tax help India offset hit from Trump tariffs?
This article is an on-site version of the India Business Briefing newsletter. To receive it in your inbox regularly, sign up if you’re a premium subscriber, or upgrade your subscription here.Good morning. At last some good news. Last week, the credit rating agency S&P Global upgraded India’s long-term unsolicited sovereign credit rating to BBB, on the back of the country’s sustained fiscal consolidation and economic resilience. This is India’s first upgrade since 2007!In today’s newsletter, US President Donald Trump’s tariffs draw China and India closer to each other. But first, the goods and services tax gets a facelift.Good and simpler tax?Will India’s goods and services tax finally live up to its billing as a “good and simple tax”? After Prime Minister Narendra Modi announced an overhaul to the value added tax system in his Independence Day speech, a draft blueprint is being circulated to the states. This would remove two current rates, leaving one of 5 per cent on essential products and one of 18 per cent on everything else, except some luxury and “sin” goods and services. They will continue to be subject to a 40 per cent levy. So big cars are likely to be taxed at 40 per cent, small cars at 18. The proposal, GST 2.0 as it is being popularly referred to, also seeks to streamline the current system in order to better enable value addition and provide long-term clarity, stability and ease of accounting. So what are the next steps? The states have to go over this proposal and come to an agreement. The group of state ministers responsible for this is expected to meet on Thursday. Its recommendations will go to the GST council, which will then deliberate on the reforms in September or October. In his speech, Modi indicated the new taxes would come into force before the festival of Diwali, which this year falls on October 20. While there is already some political bickering and one-upmanship at play, the chances are the reforms will go through even as the ruling party and opposition wrestle about who gets to take credit. (Politicking with taxes is an old sport in India, and the main reason why the annual budget announcements are such a spectacle). More importantly, the government is acknowledging the stress in the economy. Modi pitched the reform as a “double Diwali bonus”, hoping the lower taxes would drive consumption growth. The cuts will deal a hefty blow to the government’s revenues, but it is counting on resulting demand growth to help offset an expected hit to GDP from lower exports caused by Trump’s tariffs.This is the first of a series of steps the government is expected to take in order to counter criticism of its failure to secure a deal with the Trump administration. Modi’s government portrays the trade hit as an opportunity for India to focus on its domestic industry and market, and to look inward for growth. In the past couple of weeks, a number of corporate leaders have also suggested that the government should reform various regulations to make it easier for businesses to operate in India. Measures may be announced soon.While India needn’t have waited for a failed trade deal in order to reform its domestic economy, if these do indeed come about it would be a good outcome from a bad situation.Do you think GST 2.0 will succeed in actually being simple? Hit reply or email me at [email protected]Recommended storiesUS to ‘co-ordinate’ Ukraine’s security with Europe; Kyiv offers $100bn weapons deal to Trump.Investors lose billions on meme stocks as ‘pump and dump’ scams multiply.China cracks down on foreign companies stockpiling rare earths.The crypto group backed by Trump’s sons hunts for bitcoin companies in Asia.Is AI hitting a wall? OpenAI’s underwhelming new GPT-5 model suggests progress is slowing.Can a bad marriage be passed down the generations?Join 250+ policymakers, industry executives and investors at the Energy Transition Summit India on September 16 and 17 in New Delhi. Register for a free digital pass here or enjoy 20 per cent off your in-person pass here.India-China thawChinese foreign minister Wang Yi’s visit signals a continued thaw in ties between Beijing and New Delhi More
