India Simplifies Tax Regime To Boost Consumption and Growth

The BGA India team, led by Managing Director Anuj Gupta, wrote an update on India’s new tax reforms.

Context

• Continuing the recent streak of reforms to spur the economic growth, India’s Goods and Services Tax (GST) Council approved a landmark package of tax reforms aimed at simplifying tax rates, correcting inverted duty structures and enhancing exemptions in essential sectors. The changes in the GST rates will be implemented starting September 22.
• The GST reforms, while involving short-term fiscal costs to the treasury (exchequer), are expected to deliver a strong consumption and investment boost over long run, especially with festive demand on the horizon. When combined with income tax relief from the union budget 2025-26 and lower debt servicing costs due to repurchase rate cuts, the overall impact on consumption is expected to be substantial. Economists project a 0.6 percent increase in GDP over the next four to six quarters, effectively diluting the drag from higher U.S. tariffs and reinforcing India’s growth momentum.

Significance

• The GST Council, chaired by Union Finance Minister Nirmala Sitharaman, simplified India’s four-rate tax structure September 3 into a more intuitive two-rate system of 5 percent and 18 percent. A sectoral tax rate comparison is available below.
• The GST rate rationalization will not only lower prices driving up overall consumption but also drive multidimensional economic and commercial shifts.
  • A low percent rate on staples will narrow the organized versus unorganized gap by making tax evasion unattractive, bringing more businesses into the tax net.
  • The introduction of a new system for swift refunds due to inverted duty structures will not only speed up cash flows and reduce litigation but also improve exporter competitiveness.
  • Fewer tax brackets (slabs), corrections in inverted duty structures and automatic registrations will simplify compliance and promote the ease of doing business, especially for smaller businesses.
  • Following the tax cuts for the middle class in union budget 2025-26 and with inflation below 2 percent, within the Reserve Bank of India’s target band, the new GST rate cuts will reshape middle-class spending by increasing disposable income and fostering aspirational consumption.
  • Tax exemptions on life and health insurance alongside life-saving drugs will improve medical services in rural and semi-rural areas of India.
  • The reduced GST on consumer electronics and small cars acts as a structural tax cut, encouraging aspirational consumption and stabilizing demand.
  • The special tax rate of 40 percent on tobacco, cigarettes and luxury cars replaces fragmented tax rates and causes the market to break into smaller market segments.

Implications

• India’s tax relief measures complement the government’s broader reform agenda focused on strengthening the business environment, improving fiscal efficiency and fostering inclusive growth. The government’s recent domestic reforms are beginning to show tangible results, with strong momentum in both manufacturing and services sectors. In August, the HSBC Manufacturing purchasing managers’ index (PMI) was 59.1, and the Services PMI surged to 62.9, driven by robust domestic demand and rising export orders across key global markets. The composite PMI hit a 17-year high of 63.2, signaling broad-based economic resilience.
• This integrated reform approach aims to enhance economic productivity, attract investment and support long-term internal consumption-driven sustainable growth, positioning India for accelerated development throughout the decade.
  

Sectoral Tax Rate Comparison

If you have questions or comments, please contact BGA India Managing Director Anuj Gupta at agupta@bowergroupasia.com.

Best regards,

BGA India Team

Anuj Gupta

Managing Director

Anuj is a distinguished policy leader and strategist who has played a catalytic role across India’s government and private sector, guiding stakeholders through the country’s complex and evolving policy and investment landscape. As BGA’s India practice leader, he helps clients leverage the country’s rapid economic growth to advance their goals and strategies.  Anuj previously led public policy efforts for the Tata Group, India’s largest business conglomerate, where he advised more than 30 group companies on policy affairs strategy. His interventions directly influenced high-stakes outcomes across diverse sectors, including technology, finance and manufacturing.   Anuj spent a decade in the Indian and Abu Dhabi governments, where he ... Read More