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Analysts say the cuts in the Goods and Services Tax is aimed at boosting demand in the wake of 50 percent tariffs on Indian goods.
India has announced tax cuts on hundreds of consumer items ranging from soaps to small cars to spur domestic demand in the face of economic headwinds from punishing tariffs imposed by US President Donald Trump.
The measures come as the 50 percent US tariffs took effect last month, raising fears of an economic slowdown.
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The Goods and Services Tax (GST) has been overhauled to simplify India’s complex four-tier system into two slabs and cut levies across sectors, in some cases by more than half, announced Finance Minister Nirmala Sitharaman.
Sitharaman said a panel, which looked into the GST reforms, approved cuts in consumer items such as toothpaste and shampoo to 5 percent from 18 percent, and on small cars, air conditioners, and televisions to 18 percent from 28 percent.
The panel, which is headed by Sitharaman, approved the two-rate structure of 5 percent and 18 percent, instead of the four rates currently.
The new tax regime makes insurance premiums, including life and health coverage, tax-free.
The finance minister insisted the GST cuts were not linked to the “tariff turmoil”, saying they were part of long-planned reforms.
Federal and state governments are estimated to lose 480 billion Indian rupees ($5.49bn) due to the cuts that will be implemented from September 22, the first day of the Hindu festival of Navratri.
40 percent tax on ‘super luxury and ‘sin’ goods
Coupled with cuts in personal tax unveiled in February, the GST reductions are expected to boost consumption in the South Asian nation, whose economy grew at an unexpectedly higher pace of 7.8 percent in the quarter to June.
“The consumption boost in lieu of the GST rate rationalisation will more than neutralise any possible revenue impact,” said Soumya Kanti Ghosh, chief economist at SBI.
“The impact on fiscal deficit will be almost insignificant or even positive.”
The panel approved a tax of 40 percent on “super luxury” and “sin” goods such as cigarettes, cars with engine capacity exceeding 1,500 cubic centimetres (91.5cu inches), and carbonated beverages, the minister said.
The move is expected to boost sales of fast-moving consumer goods firms such as Hindustan Unilever and Godrej Industries, and consumer electronics companies such as Samsung Electronics, LG Electronics, and Sony.
Carmakers such as Maruti, Toyota Motor, and Suzuki Motor are expected to be big winners. The rush to cut the tax was triggered by Prime Minister Narendra Modi’s call for greater self-reliance in India, pledging last month to lower the GST by October to counter the US tariffs of up to 50 percent.
After the tax cuts announced on Wednesday, Modi said, “The wide-ranging reforms will improve lives of our citizens and ensure ease of doing business for all, especially small traders and businesses.”
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