India’s GST antidote to Trump’s biting tariff

India’s GST antidote to Trump’s biting tariff

Effective from 22 September, the move will revive domestic demand as American tax rates threaten exports

The Government of India has launched an all-embracing tax reform since the Goods and Services Tax (GST) was introduced in 2017. It dismantled four slabs into two rates and added a steep 40 percent levy on luxury goods.

The GST Council has consolidated most items into the 5 percent and 18 percent brackets.

While hair oil, butter, and cheese now attract 5 percent tax, TVs, refrigerators, and small cars fall 18 percent. Luxury cars, premium motorcycles, and tobacco will be taxed at 40 percent.

Importantly, providing succor to the middle-class, it has scrapped 18 percent GST on health and life insurance and 36 critical drugs, and shifted household staples and appliances into lower categories.

Minister of Finance, Nirmala Sitharaman, said the reforms “prioritize middle-class relief while maintaining fiscal balance through higher taxes on luxury items.”

Commenting on the move, Himanshu Sinha, partner at Trilegal, said, “This pivotal move aims to rationalize the tax regime, stimulate consumption, and bolster economic growth.”

The boldest fiscal reset will cut costs for households and healthcare but burden states with steep revenue losses. Considered an economic gamble to spur consumption and cushion export shocks, it has however, deepened the fiscal divide between the Centre and states.

States are expected to lose Rs.67,700 crore annually versus the Centre’s Rs.28,300 crore, with gross losses projected at Rs.1.11 lakh crore in FY 2026.

Since GST accounts for over 40 percent of state revenues, budgets will come under pressure even as New Delhi bets rising consumption will soften the blow.

The remodeling came weeks after US President Donald Trump slapped India with tariffs of up to 50 percent on most exports, hitting textiles, jewelry, and IT services.

Financial experts claim that the GST cuts could lift growth from 6.5 percent to 6.7 percent in FY 2026 and lower inflation by up to 75 basis points by shifting the growth engine to domestic consumption.

Meanwhile, healthcare is one of the clearest beneficiaries.

As Ashwin Sapra, partner and head of pharma and healthcare at Cyril Amarchand Mangaldas, remarked, “The complete removal of GST on individual health insurance will have a positive effect in making it more affordable as healthcare costs see an upward trend.”

While the Council has resolved issues, including clarifying post-sale discounts, Jitendra Motwani, partner at Economic Laws Practice, stated, “This issue has been contentious since the inception of GST, aligning tax treatment with commercial realities.”

Additionally, simplifying GST rules will likely reduce classification disputes, which led to litigation over items such as parathas, coconut oil, and popcorn.

SR Patnaik, partner and head of taxation at Cyril Amarchand Mangaldas asserted, “The decisions taken by the GST Council are expected to reduce disputes since most of the similar-looking goods have been clubbed together and attract the same tax. Bringing a closure to such potential disputes is expected to free up a significant amount of cash flows for the businesses.”

Rinkey Jassuja, partner at Economic Laws Practice, felt that exporters may also benefit from the planned deletion of Section 13(8)(b) of the Integrated Goods and Services Tax (IGST) Act. She said, “Its proposed removal could reclassify such services as exports under Section 16, enabling zero-rating benefits and the refund of blocked Input Tax Credit (ITC).”

The government took another significant decision to bring local delivery services offered via e-commerce operators under GST at 18 percent. Thus, online platforms will now bear the liability where delivery partners are unregistered.

Ankit Jain, partner at Ved Jain and Associates, added, “By taxing delivery at the platform level, the Council ensures that revenue is not lost due to the unregistered status of gig workers.”

For delivery operators, the levy is a hit. Alay Razvi, managing partner at Accord Juris, expressed, “The Council’s decision fundamentally reshapes the delivery economy. With no ITC, platforms will inevitably revisit pricing, delivery charges, and partner payouts, while overhauling invoicing and reporting systems.”

With this, Zomato and Swiggy each face an annual GST burden of Rs.180–200 crore, a cost that will likely be split between customers, delivery partners, or the platforms.

Meanwhile, concerns have been raised over inverted duty structures, especially in textiles and footwear.

Gopal Mundhra, partner at Economic Laws Practice, said, “The accumulation of credit on account of the input services (procured @18 percent) would be an area of concern, given that the textile sector functions on a very thin margin.”

However, economists argued that the reforms bring GST closer to its original intent of simplicity. Renewable energy devices and manufacturing inputs now attract 5 percent, while textile fixes aim to boost competitiveness.

Gourav Sogani, partner at Economic Laws Practice, stressed, “What’s crucial is that a robust mechanism addresses inverted duty structures so that genuine relief percolates to benefit consumers.”