The GST rate rationalisation, which came about 8 years after the landmark indirect tax came into effect, is going to impact the entire population of the country and kick off a “virtuous” economic cycle by boosting consumption, Union finance minister Nirmala Sitharaman said on Saturday.
“This is a reform which touches the lives of all 140-crore people. There is no individual in this country who is untouched by GST. The poorest of the poor also have something small that they buy touched by GST,” the FM said on Saturday.
Sitharaman expressed hope that the rate cuts would boost consumption, which in turn will translate to a virtuous economic cycle. Although the FM offered no further details, it is widely expected that stronger consumer demand could prompt manufacturers to scale up capacity, generating jobs and spurring broader economic activity.
The rationalisation effectively moves the median tax rate from 12 per cent to 5 per cent for 391 items. With these changes, the weighted average GST rate is likely to reduce to single digit after the GST rejig from 11.64 per cent in 2023-24 and 14.4 per cent in 2017.
The GST reform, to be effective from September 22, is the third intervention by the Modi government to spur consumption and private capex. In February, the Centre announced a sweeping income tax cut to put more money in the hands of people, especially the middle class.
The Reserve Bank of India, headed by a former revenue secretary, has also cut benchmark lending rate by 100 basis points (1 percentage points), making loans cheaper.
However, the far-reaching impact of the GST rate cut is likely to be unmatched. For instance, only 6 per cent of India’s population files tax returns and out of those who file, around 65.5 per cent file zero tax returns. Likewise, the rate cut primarily benefits individual borrowers, and corporates.
While the Centre took the lead in GST changes, the states also joined in despite fear of losing revenue. Sitharaman said she has written to all state FMs, thanking them for their role in GST overhaul.