Indian Prime Minister Narendra Modi has proposed sweeping cuts to the country’s goods and services tax (GST) in a move that could provide significant relief to consumers feeling the pressure of potential US tariffs. The proposed reforms aim to simplify India’s complex tax structure and stimulate domestic demand at a critical economic juncture.
Currently, India’s GST operates under a four-tier system, with rates ranging from 5% to 28%. Under Modi’s plan, most goods would fall into just two tiers—5% or 18%. The changes, which Modi has framed as a “Diwali gift” to the public, could reduce annual tax collections by anywhere between $13 billion and $17 billion, according to economists.
The timing of the announcement is no coincidence. US President Donald Trump has threatened to double import duties on Indian goods from 25% to 50% in retaliation for India’s continued purchases of Russian oil, a move Washington argues indirectly funds Russia’s war in Ukraine. The proposed tariffs, if enacted, could severely impact India’s export sector, jeopardizing jobs and economic growth.
While New Delhi has condemned the US move as “unfair, unjustified, and unreasonable,” the government is already taking preemptive measures. The GST cuts are seen as a way to offset some of the financial strain on households and businesses. Analysts at Emkay Global Financial Services describe the policy as a “welcome reform towards boosting domestic consumption.”
If implemented, the changes could benefit a wide range of industries. Motilal Oswal, a leading financial services firm, notes that households could see substantial savings, particularly on items like small cars, air conditioners, and consumer electronics. However, the proposal still needs approval from the GST Council, a body that includes state government representatives and has a history of struggling to reach consensus.
Public finances could take a hit if the tax cuts are enacted, but economists argue that the move may be necessary to counteract the broader economic risks posed by the potential US tariffs. Some experts estimate that failure to secure a trade deal with the US could push India’s GDP growth below 6% this fiscal year—lower than the Reserve Bank of India’s 6.5% projection.
The political undercurrents are hard to ignore. The proposal comes just ahead of crucial state elections in Bihar, a key political battleground for Modi’s Bharatiya Janata Party (BJP). As Professor Deepanshu Mohan of O.P. Jindal Global University notes, the “GST readjustment is a strong response” to the growing narrative of US-India trade tensions. It sends a message to the middle class that the government is working to ease their financial burden.
Yet the long-term implications of India’s reliance on Russian oil remain uncertain. Trade analysts indicate that while Indian refiners are exploring alternatives, Russian crude continues to make up a significant portion of imports. The coming weeks will be critical as August shipments—largely contracted before Trump’s tariff threats—arrive, clarifying India’s next steps.
With US-India trade negotiations in a precarious state, and reports suggesting delayed diplomatic talks, the Modi government’s tax reforms may be just the first in a series of measures aimed at stabilizing the economy and maintaining domestic confidence.