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After rationalising corporate and personal income taxes, the government is preparing to simplify and lower goods and services tax (GST) rates. The simplification of GST rates is much needed. Lower taxes on daily necessities will reduce prices and benefit consumers, providing a fiscal stimulus for consumption.
The proposal comes on the back of a sovereign credit rating upgrade by S&P Global. This upgrade can help lower borrowing costs for Indian entities. Some economists believe lower GST rates leading to lower product prices could also help lower inflation, creating more room for rate cuts.
Yet, tax cuts by themselves may not boost the economy. Much also depends on US tariffs, international trade and domestic demand. Moreover, as economists at HSBC warn, one should also see how the government funds the GST rate cuts.
Readers may note that personal income tax cuts have so far failed to reverse the consumption softness in the domestic economy. “Previous attempts by the government to boost consumption demand or investment through tax cuts (income tax cut, corporate tax cut) have not had the intended outcomes,” said analysts at Kotak Institutional Equities in a note.
State governments tend to neutralise some of the central government’s measures by raising taxes that they have a right to levy on automobiles, real estate and others.
Tax cuts work best when companies pass on the full benefits. Consumers and corporates should also feel confident about future prospects, incomes.
Simultaneously, the government should work on external relations and soften the blow from the current global economic uncertainty.
Though relatively less exposed to global markets, sustained high tariffs on India can adversely weigh on the domestic economy. “If US tariffs are sustained at levels significantly higher than in other Asian markets, we see moderate downside risks to our projection that the economy will grow by 6.5 percent in FY26,” Fitch Ratings said in an update.
Note that some of the current softness in urban consumption is attributed to the moderating and stagnant disposable incomes of white-collar workers, notably in the IT services industry. Steps to alleviate some of the demand risks will go a long way in strengthening the domestic economy.
“It would serve India well to have a growth plan, ranging from fiscal support (incentives for exporters), monetary easing (we believe there is some more room available for rate cuts), to structural reforms,” added economists at HSBC.
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R Sree Ram
Moneycontrol Pro
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