GST Slash Frenzy: India’s Tax Turbocharge or Tariff Trap?
Finance Minister Nirmala Sitharaman briefs media on GST Council decisions! (Image PIB India)
The cuts may boost demand now, but their success depends on offsetting revenue losses and navigating geopolitical shifts.
By P SESH KUMAR
NEW DELHI, September 5, 2025 — India’s recent GST rate cuts, streamlining the tax structure to primarily 5% and 18% slabs effective September 22, 2025, have sparked widespread excitement as a potential catalyst for consumer spending, economic growth, and a buffer against US President Donald Trump’s “punitive” 50% tariffs on Indian exports. Proponents tout it as a festive season booster that could elevate GDP by up to 1.2% and curb inflation, drawing cheers from industry leaders and stock markets.
However, this optimism is tempered by stark criticisms, including massive revenue shortfalls estimated at ₹48,000 to ₹2 lakh crore, state governments’ fears of fiscal starvation, and doubts over its efficacy in truly offsetting global trade disruptions. It’s worthwhile to examine if the reforms are a genuine game-changer or a risky gamble amid federal tensions and international pressures.
The Bombshell Announcement
The government just dropped a bombshell on the GST front, slashing rates like a daredevil economist wielding a chainsaw, promising to ignite consumer spending and supercharge the economy right when Trump’s tariff hammer is pounding Indian exports into the ground. Announced on September 4, 2025, and kicking in from September 22, these cuts collapse the messy four-slab system into a sleek duo of 5% and 18%, with a punitive 40% reserved for sin goods like tobacco and luxury rides.
Everyday essentials—think soaps, toothpaste, instant coffee, and even life-saving health insurance premiums—plunge to 5% or zero, while big-ticket items like ACs, TVs, and washing machines slide from 28% to 18%.
Hailing the Game-Changer
Finance Minister Nirmala Sitharaman hailed it as a “game-changer” for the common man, farmers, and industries, timed perfectly for the festive season to pump up domestic demand and offset global gloom. Industry bigwigs appear to be popping champagne, some vowing to pass on savings and predicting a consumption boom that could add 0.1-1.2% to GDP while taming inflation by 40-60 basis points.
It has got the stock market buzzing, with Sensex and Nifty rallying as auto and FMCG stocks surge, and even the dairy sector—worth a whopping ₹19 trillion—gearing up for a demand explosion. In a world where India’s 7.8% Q1 growth defies gravity, this feels like rocket fuel, especially as it eyes countering Trump’s August 27, 2025, slap of 50% tariffs on Indian imports, punishment for New Delhi’s hefty Russian oil buys amid the Ukraine mess.
Pivoting Against Tariffs
Analysts are cheering that lower GST will juice disposable incomes, fuelling internal growth to blunt the export bleed, where consumption already drives 60% of GDP— a clever pivot from tariff-troubled trade lanes.
Pumping the Brakes on Euphoria
But pump the brakes on that euphoria, because this tax tango may not be all fireworks and high-fives. Critics are sharpening their knives, pointing out that the revenue hit could be a gut punch, with estimates ranging from ₹48,000 crore annually to a staggering ₹2 lakh crore shared between centre and states, potentially derailing fiscal consolidation without the promised buoyancy from higher spending.
States in Revolt
Opposition-ruled states are in full revolt mode: Kerala warns of an ₹8,000-10,000 crore yearly shortfall, Jharkhand eyes ₹2,000 crore in losses, and heavyweights like Maharashtra and Tamil Nadu brace for the biggest absolute drops. They are demanding extended compensation cess beyond its sunset, arguing that merging slabs shifts resources unfairly and could starve local budgets for essentials like urban infrastructure and citizen welfare.
Some say it is a delayed action and has the ensuing Bihar elections as the immediate provocation. Even the centre’s own math, per SBI reports, pegs its slice of the loss at ₹3,700 crore for FY26, cushioned only if consumption skyrockets—but what if it doesn’t, amid lingering inequalities and a middle class squeezed by job woes?
Tariffs: A Partial Shield at Best
And on the Trump front, sure, GST cuts might soften the domestic blow by making Indian goods cheaper at home, encouraging a shift from exports to local markets and potentially neutralizing some tariff pain through volume gains in sectors like FMCG and autos.
Yet, experts like those at Standard Chartered caution that a persistent 50% US wall could wipe out any GDP uplift, pushing Modi closer to BRICS buddies Russia and China for trade lifelines, while exporters in textiles, pharma, and IT—already jittery over whispers of extended tariffs to services—face uncompetitive pricing abroad.
Trump’s move, doubling duties to penalize India’s oil diplomacy, has sparked fears of job losses in export hubs, with former aides slamming it as a setback to US-India ties.
Global Echoes and Double-Edged Swords
Global experiences echo the double-edged sword: while GST simplifications in places like Canada and Australia boosted efficiency and growth, initial revenue dips sparked political firestorms, and India’s federal setup amplifies those risks.
In the end, this reform screams ambition, but without ironclad compliance, tech-backed enforcement, and a rebound in global trade, it might just be a sugar rush masking deeper cracks—exciting yes, but gung-ho? Only if you are betting the farm on consumer euphoria trumping fiscal fears and tariff tempests.
While the cuts promise immediate relief and a domestic demand surge, their long-term success hinges on mitigating revenue losses and adapting to geopolitical shifts. A balanced approach, blending optimism with vigilant monitoring, could transform this bold step into a sustainable economic accelerator, but overlooking the challenges risks turning potential triumph into turmoil.
(This is an opinion piece, and views expressed are those of the author only)
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