Editorial: Pass on GST benefits to consumers

While the sweeping reduction of GST rates is a welcome move, the Centre must also address the legitimate concerns of the States over the potential revenue losses

In the midst of trade tensions with the United States, the drastic Goods and Services Tax (GST) rate cut has brought much-needed relief to the consumers ahead of the festival season. The long-delayed GST reforms have finally taken effect and will hopefully help in reviving consumption, boosting confidence, and nudging Indians toward a self-reliant economy. Framed by the central government as ‘Bachat Utsav’ – savings fest –, the reduced GST rates could have a transformative impact on the economy because India has never had such low indirect taxes before. However, the success of the GST 2.0 would depend on how quickly the companies pass on the benefits of tax cuts to the consumers. Small traders, often slow to adjust inventories, could lag in implementing the new rates, blunting the policy’s immediate effect. For the first time, cars, ACs, large refrigerators, and television sets are not seen as luxuries or sin goods, but as household necessities. Lowering prices to boost demand is in the interest of the industry. It can kickstart the virtuous cycle that leads to new capital investments, jobs, and scale. By lowering GST on a wide range of essentials and semi-luxuries, ranging from items of everyday use to life insurance, small cars, television sets, and air conditioners, the government has ensured that the benefits land precisely when consumers are most likely to spend. Lower interest rates and earlier income-tax relief add fuel to this seasonal stimulus. The immediate benefits are massive: middle-class families gain purchasing power, and companies selling consumer goods and vehicles enjoy a demand spike.

The timing of the rollout has a broader economic goal, which was spelt out by Prime Minister Narendra Modi when he exhorted people to embrace ‘Swadeshi’ and prefer Indian-made products and reduce dependence on foreign brands. As the US imposes punishing tariffs on Indian exports, encouraging domestic demand for local goods offers a buffer against external shocks and signals political resolve. While the sweeping reduction of GST rates must be welcomed as they would ease the common man’s burden, the Centre must also address the legitimate concerns of the States over the potential revenue losses. There is a strong case for compensation because the GST rate cuts would disproportionately affect the finances of the States, which are more dependent on the GST revenues compared to the central government. It is estimated that the anticipated revenue foregone due to proposed tax cuts will be around Rs 50,000 crore during the current financial year and nearly Rs 1.4 lakh crore in the next financial year. Since 70 per cent of the burden would fall on the States, the demand for compensation is perfectly legitimate. The success of the GST reforms would depend on how well the States are compensated. The onus is now on the Centre to evolve a mechanism to safeguard the interests of the States.

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