Modi's tax overhaul to strain finances but boost image amid US trade tensions
In the biggest tax overhaul since 2017, Modi's government on Saturday announced sweeping changes to the complex goods and services tax (GST) regime which will make daily essentials and electronics cheaper from October, helping consumers and also companies like Nestle, Samsung and LG Electronics.
At the same time, in his Independence Day speech on Friday, Modi urged Indians to use more goods made domestically, echoing calls from many of his supporters to boycott U.S. products after Donald Trump hiked tariffs on imports from India to 50% as of August 27.
The tax cut plan comes with costs given GST is a major revenue generator. IDFC First Bank says the cuts will boost India's GDP by 0.6 percentage points over 12 months but will cost the state and federal government $20 billion annually.
But it will improve weak stock market sentiment and bring political dividends for Modi ahead of a critical state election in the eastern state of Bihar, said Rasheed Kidwai, a fellow at New Delhi-based Observer Research Foundation.
'GST reduction will impact everyone, unlike cuts to income tax, which is paid by only 3%-4% of the population. Modi is doing this as he is under a lot of pressure due to U.S. policies,' said Kidwai.
'The move will also help the stock market, which is now politically important as it has a lot of retail investors.'
India launched the major tax system in 2017 that subsumed local state taxes into the new, nationwide GST to unify its economy for the first time.
But the biggest tax reform since India's independence faced criticism for its complex design that taxes products and services under four slabs - 5%, 12%, 18% and 28%.
Last year, India said caramel popcorn would be taxed at 18% but the salted category at 5%, triggering criticism about a glaring example of GST's complexities.
Under the new system, India will abolish the 28% slab - which includes cars and electronics - and move nearly all of the items under the 12% category to the lower 5% slab, benefitting many more consumer items and packaged foods.
Government data shows the 28% and 12% tax slabs together garner 16% of India's annual GST revenue of roughly $250 billion last fiscal year.
'A brighter gift' and politics
Bihar is a key state politically and goes to the polls by November. A recent survey by the VoteVibe agency showed Modi's opposition has an edge largely because of a lack of jobs.
'Any tax cut has wide public appreciation. But of course, the timing is purely determined by political exigencies,' said Dilip Cherian, a communications consultant and co-founder of Indian public relations firm Perfect Relations.
'It seems to be an indication of some mixture of frustration as well as recognition that there is a broad public pushback against high and crippling rates of taxation.'
Modi's ruling Bharatiya Janata Party has seized on his tax announcement, posting on X that on the Hindu festival of lights, Diwali, 'a brighter gift of simpler taxes and more savings is waiting for every Indian.'
Modi has vowed to protect farmers, fishermen and cattlemen, following Trump's surprise tariff announcement on India, after trade talks between New Delhi and Washington collapsed over disagreement on opening India's vast farm and dairy sectors and stopping Russian oil purchases.
The latest round of trade talks between the two nations set for August 25-29 has also been called off - REUTERS
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New Straits Times
an hour ago
- New Straits Times
Modi's sweeping tax cuts to dent revenues but lift image amid US trade row
NEW DELHI: Indian Prime Minister Narendra Modi's deepest tax cuts in eight years will strain government revenues but are winning praise from businesses and political pundits who say they will bolster his image in an ongoing trade fight with Washington. In the biggest tax overhaul since 2017, Modi's government on Saturday announced sweeping changes to the complex goods and services tax (GST) regime which will make daily essentials and electronics cheaper from October, helping consumers and also companies like Nestle, Samsung and LG Electronics. At the same time, in his Independence Day speech on Friday, Modi urged Indians to use more goods made domestically, echoing calls from many of his supporters to boycott US products after Donald Trump hiked tariffs on imports from India to 50 per cent as of Aug 27. The tax cut plan comes with costs given GST is a major revenue generator. IDFC First Bank says the cuts will boost India's GDP by 0.6 percentage points over 12 months but will cost the state and federal government US$20 billion annually. But it will improve weak stock market sentiment and bring political dividends for Modi ahead of a critical state election in the eastern state of Bihar, said Rasheed Kidwai, a fellow at New Delhi-based Observer Research Foundation. "GST reduction will impact everyone, unlike cuts to income tax, which is paid by only 3 per cent-4 per cent of the population. Modi is doing this as he is under a lot of pressure due to US policies," said Kidwai. "The move will also help the stock market, which is now politically important as it has a lot of retail investors." India launched the major tax system in 2017 that subsumed local state taxes into the new, nationwide GST to unify its economy for the first time. But the biggest tax reform since India's independence faced criticism for its complex design that taxes products and services under four slabs - 5 per cent, 12 per cent, 18 per cent and 28 per cent. Last year, India said caramel popcorn would be taxed at 18 per cent but the salted category at 5 per cent, triggering criticism about a glaring example of GST's complexities. Under the new system, India will abolish the 28 per cent slab - which includes cars and electronics - and move nearly all of the items under the 12 per cent category to the lower 5 per cent slab, benefitting many more consumer items and packaged foods. Government data shows the 28 per cent and 12 per cent tax slabs together garner 16 per cent of India's annual GST revenue of roughly US$250 billion last fiscal year. 'A BRIGHTER GIFT' AND POLITICS Bihar is a key state politically and goes to the polls by November. A recent survey by the VoteVibe agency showed Modi's opposition has an edge largely because of a lack of jobs. "Any tax cut has wide public appreciation. But of course, the timing is purely determined by political exigencies," said Dilip Cherian, a communications consultant and co-founder of Indian public relations firm Perfect Relations. "It seems to be an indication of some mixture of frustration as well as recognition that there is a broad public pushback against high and crippling rates of taxation." Modi's ruling Bharatiya Janata Party has seized on his tax announcement, posting on X that on the Hindu festival of lights, Diwali, "a brighter gift of simpler taxes and more savings is waiting for every Indian." Modi has vowed to protect farmers, fishermen and cattlemen, following Trump's surprise tariff announcement on India, after trade talks between New Delhi and Washington collapsed over disagreement on opening India's vast farm and dairy sectors and stopping Russian oil purchases. The latest round of trade talks between the two nations set for August 25-29 has also been called off.
New Straits Times
2 hours ago
- New Straits Times
Modi's tax overhaul to strain finances but boost image amid US trade tensions
NEW DELHI: Indian Prime Minister Narendra Modi's deepest tax cuts in eight years will strain government revenues but are winning praise from businesses and political pundits who say they will bolster his image in an ongoing trade fight with Washington. In the biggest tax overhaul since 2017, Modi's government on Saturday announced sweeping changes to the complex goods and services tax (GST) regime which will make daily essentials and electronics cheaper from October, helping consumers and also companies like Nestle, Samsung and LG Electronics. At the same time, in his Independence Day speech on Friday, Modi urged Indians to use more goods made domestically, echoing calls from many of his supporters to boycott US products after Donald Trump hiked tariffs on imports from India to 50 per cent as of Aug 27. The tax cut plan comes with costs given GST is a major revenue generator. IDFC First Bank says the cuts will boost India's GDP by 0.6 percentage points over 12 months but will cost the state and federal government US$20 billion annually. But it will improve weak stock market sentiment and bring political dividends for Modi ahead of a critical state election in the eastern state of Bihar, said Rasheed Kidwai, a fellow at New Delhi-based Observer Research Foundation. "GST reduction will impact everyone, unlike cuts to income tax, which is paid by only 3 per cent-4 per cent of the population. Modi is doing this as he is under a lot of pressure due to US policies," said Kidwai. "The move will also help the stock market, which is now politically important as it has a lot of retail investors." India launched the major tax system in 2017 that subsumed local state taxes into the new, nationwide GST to unify its economy for the first time. But the biggest tax reform since India's independence faced criticism for its complex design that taxes products and services under four slabs - 5 per cent, 12 per cent, 18 per cent and 28 per cent. Last year, India said caramel popcorn would be taxed at 18 per cent but the salted category at 5 per cent, triggering criticism about a glaring example of GST's complexities. Under the new system, India will abolish the 28 per cent slab - which includes cars and electronics - and move nearly all of the items under the 12 per cent category to the lower 5 per cent slab, benefitting many more consumer items and packaged foods. Government data shows the 28 per cent and 12 per cent tax slabs together garner 16 per cent of India's annual GST revenue of roughly US$250 billion last fiscal year. 'A BRIGHTER GIFT' AND POLITICS Bihar is a key state politically and goes to the polls by November. A recent survey by the VoteVibe agency showed Modi's opposition has an edge largely because of a lack of jobs. "Any tax cut has wide public appreciation. But of course, the timing is purely determined by political exigencies," said Dilip Cherian, a communications consultant and co-founder of Indian public relations firm Perfect Relations. "It seems to be an indication of some mixture of frustration as well as recognition that there is a broad public pushback against high and crippling rates of taxation." Modi's ruling Bharatiya Janata Party has seized on his tax announcement, posting on X that on the Hindu festival of lights, Diwali, "a brighter gift of simpler taxes and more savings is waiting for every Indian." Modi has vowed to protect farmers, fishermen and cattlemen, following Trump's surprise tariff announcement on India, after trade talks between New Delhi and Washington collapsed over disagreement on opening India's vast farm and dairy sectors and stopping Russian oil purchases. The latest round of trade talks between the two nations set for August 25-29 has also been called off.
New Straits Times
2 hours ago
- New Straits Times
India proposes lowering GST on small cars, insurance premiums
NEW DELHI: India has proposed lowering the Goods and Services tax (GST) on small cars to 18 per cent from the current 28 per cent as part of sweeping consumption tax cuts, a government source said on Monday. The reduction, part of a programme of tax cuts announced by Prime Minister Narendra Modi on Friday, will boost sales of the country's biggest carmaker Maruti Suzuki. The federal government has suggested lowering GST on small petrol and diesel cars to 18 per cent from the current 28 per cent, said the source who is directly involved in the matter. GST on health and life insurance premiums may also be lowered to 5 per cent or even zero from 18 per cent currently, the same source said. The tax cuts, if approved, are expected to be announced by Diwali, a major, five-day Hindu festival in October, the source said. Diwali is also the country's biggest shopping season. India's finance ministry did not reply to an e-mail seeking comment. Sales of small cars, defined as those having engine capacity below 1200cc for petrol vehicles and 1500cc for diesel and not exceeding 4 metres in length, have slowed over the last few years as buyers switched to bigger, feature-rich SUVs. Small cars made up a third of the 4.3 million passenger vehicles sold in the world's third-largest automobile market last fiscal year, down from nearly 50 per cent pre-COVID, industry data showed. The tax cut will be a big win for Maruti, whose market share has plunged to about 40 per cent from over 50 per cent in the last five years as sales of its small cars such as Alto, Dzire and Wagon-R dropped. The segment makes up half of all cars sold by Maruti - majority-owned by Japan's Suzuki Motor. Carmakers Hyundai Motor India and Tata Motors also stand to gain. Cars with higher engine capacity that attract a 28 per cent GST and additional levy of up to 22 per cent - resulting in total taxes of about 50 per cent - may come under a new special rate of 40 per cent, the source said. The source added that details are being firmed up to consider if any extra levies should be imposed over the 40 per cent to keep the overall tax incidence for big cars the same at 43 per cent-50 per cent.
