Is the GST Overhaul a Major Step Towards Consumption-Led Growth?
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Synopsis
The upcoming overhaul of the Goods and Services Tax (GST) is set to reshape India's economic landscape. Effective from September 22, this reform aims to encourage consumption-led growth, addressing the inherent regressive nature of indirect taxes. Experts predict significant impacts on various sectors, including FMCG and automobiles. Discover how these changes will influence the economy.
Key Takeaways
- GST overhaul effective from September 22
- Shifts to a dual-slab system
- Estimated net revenue loss of Rs 480 billion
- Potential boost to domestic demand by 0.6 percent of GDP
- Impact on sectors like FMCG and automobiles
New Delhi, Sep 5 (NationPress) The overhaul of the Goods and Services Tax (GST), effective from September 22, represents a crucial move aimed at boosting growth through consumption-driven strategies. This shift is particularly significant considering the regressive nature of indirect taxes, as highlighted in a recent report.
According to the report by Emkay, the estimated loss to the exchequer stands at 0.14 percent of GDP, with states likely facing a more substantial impact. However, the discontinuation of the compensation cess—accounting for nearly 0.5 percent of GDP—is expected to create a de facto demand surge in the economy, despite that revenue not being utilized for fiscal budgetary flows.
Emkay's analysis supports the enduring theme of sectoral rotation favoring consumption over capital expenditure.
Furthermore, these tax modifications are anticipated to contribute an additional 0.6 percent of GDP to domestic demand annually, which should enhance consumption in sectors such as FMCG, consumer durables, automobiles, and similar industries.
The government projects a net revenue loss of Rs 480 billion (0.14 percent of GDP) due to GST changes, with a gross revenue loss of Rs 930 billion. On the bright side, the introduction of a new category for sin/luxury tax is expected to generate an additional revenue of Rs 450 billion.
The calculations were performed using the FY24 consumption basket as a baseline, which may alleviate some concerns regarding fiscal slippage in the bond market.
Additionally, the report suggests that some financial buffers might emerge from increased non-tax revenue, bolstered by higher dividends from the RBI and public sector units (PSUs), as well as potential divestments in IDBI and stakes in public sector banks (PSBs).
The GST rationalization, sanctioned by the GST Council, will transition to a dual-slab system starting September 22, moving to 5 percent and 18 percent GST slabs, which will replace the existing four-tier structure, along with a 40 percent slab for luxury and sin goods (primarily intoxicants).
Point of View
I believe the GST overhaul signifies a pivotal moment for India's economic strategy. It aligns with our nation's focus on fostering consumption-led growth, which has the potential to revitalize multiple sectors. While there are concerns about revenue losses, the broader goal of stimulating demand and supporting consumers should be prioritized.
NationPress
05/09/2025
Frequently Asked Questions
What is the GST overhaul?
The GST overhaul refers to significant changes in the Goods and Services Tax set to take effect on September 22, aiming to enhance economic growth through consumption-led strategies.
How will the GST changes impact the economy?
The changes are expected to boost domestic demand by over 0.6 percent of GDP annually and significantly impact sectors like FMCG, consumer durables, and automobiles.
What is the estimated revenue loss from the GST overhaul?
The government estimates a net revenue loss of Rs 480 billion (0.14 percent of GDP) and a gross revenue loss of Rs 930 billion due to the GST changes.
What are the new GST slabs?
The revised GST structure will introduce a dual-slab system with 5 percent and 18 percent GST slabs, along with a 40 percent slab for luxury and sin goods.
Will there be new sources of revenue?
Yes, the introduction of a new category of sin/luxury tax is expected to generate an additional Rs 450 billion in revenue.
