US tariffs: GST cuts help but India must raise its game

India could use a mix of defensive and offensive options to shield itself from America's steep tariffs

- NARAYAN RAMACHANDRAN

Nothing focuses the mind like a commonly felt external threat. Suddenly, the quagmire that had developed in India's goods and services tax (GST) regime has been cleaned up. Even though the GST Council had begun to discuss changes some time ago, those discussions were gridlocked. Voila, just this week, we have GST rate simplification, thanks to US President Donald Trump's 50% effective tariff on India.

GST rate simplification was long overdue. Rates had been absurdly high and fiendishly convoluted. An identifiable part of a single finished product could have a different rate from the rest of the product, resulting in several memes on social media. In some sectors like textiles, there was even a 'tax inversion,' meaning that the GST rate on inputs in that sector was lower than the rate on output.

First, the good news. The overall blended rate of GST, at an estimated 9.5%, will decline by about 2% from last year and about 5% from its peak in 2017. This will directly find its way to household and corporate savings, stimulating consumption. For households, this is an unambiguous positive. For corporations that could not utilize all their input credit, this will be a moderate positive. For exporters, who are not subject to GST on export goods, this will reduce the burden of waiting for a refund on input GST paid. Some sectors like textiles will appreciate that tax inversion has been eliminated.

For instance, rates on synthetic fibre and yarn will now be the same as that on garments up to ₹2,500, whereas earlier they were taxed at a higher rate than garments.