PM Modi’s GST Overhaul to Slash Taxes by Diwali

Prime Minister Narendra Modi announced a transformative overhaul of the Goods and Services Tax (GST) system, urging states to cooperate in implementing the next-generation reforms before Diwali. Speaking after inaugurating two expressways in Delhi, Modi revealed that the Centre has circulated a draft proposal to simplify the GST framework and revise tax rates, promising significant relief for the poor, middle class, and businesses.

The proposed reforms aim to streamline the current four-slab GST structure—nil/zero, 5%, 12%, 18%, and 28%—into just two slabs: 5% and 18%, with a special 40% rate for 5-7 demerit goods like tobacco and online gaming. “This Diwali, people will get a double bonus from GST reforms, making daily essentials cheaper and boosting businesses,” Modi said, emphasizing that the changes will enhance affordability and stimulate consumption.

Announced during his Independence Day speech on August 15, the reforms reflect Modi’s vision of “good governance through continuous improvement.” The Finance Ministry has sent the proposal to a Group of Ministers (GoM) for review, with the GST Council set to meet next month to finalize details. Approximately 99% of items currently taxed at 12%, such as butter and fruit juices, will shift to the 5% slab, while 90% of 28% slab items, including electronics like ACs and fridges, will move to 18%.

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The overhaul addresses external pressures, including US tariffs of 25% on Indian exports like textiles and jewellery, set to double to 50% from August 27 due to India’s oil purchases from Russia. Modi pitched the reforms as a countermeasure to boost domestic consumption and support local industries. “Be vocal for local,” he urged, encouraging citizens to buy made-in-India products to strengthen the economy.

Modi highlighted India’s manufacturing strides, noting that the country now exports 30-35 crore mobile phones annually, a shift from heavy import reliance a decade ago. He called on shopkeepers to prioritize Indian-made goods, emphasizing that every sale supports local workers and keeps money within the economy. The success of UPI as the world’s largest real-time payment platform and growing global demand for Indian rail coaches were cited as examples of India’s rising self-reliance.

While the reforms promise reduced tax burdens and simpler compliance, the shift to a two-slab system may lead to initial revenue losses, with 12% slab items contributing 5-6% of GST revenue. The Centre is optimistic that increased consumption will offset deficits, aligning with the Laffer curve principle. However, some states may resist due to fiscal concerns, prompting Modi to stress cooperative federalism. “I urge states to act swiftly so Diwali becomes more fabulous for all,” he said.

The GST Council’s upcoming discussions will be crucial, with potential debates over revenue impacts and rate adjustments for items like health insurance premiums. As India gears up for a festive season boost, Modi’s reforms aim to make GST more people-friendly, fostering economic growth and easing the cost of living.

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