Can GST 2.0 spark a growth boom?

Prime Minister Narendra Modi used his Independence Day address to announce a sweeping simplification of India's goods and services tax (GST) regime.

- DEBASHIS BASU

The patchwork of the four main rates (5 per cent, 12 per cent, 18 per cent, and 28 per cent) will now be collapsed into two — 5 per cent and 18 per cent. A punitive 40 per cent levy will remain for "sin" goods such as tobacco.

The aim, the government said, is to ease compliance, reduce distortions, and put more money in consumers' hands. To investors and economists, the announcement sounded eerily familiar. Six years ago, on September 20, 2019, Union Finance Minister Nirmala Sitharaman stunned India Inc by slashing corporate-tax rates from 30 per cent to 22 per cent, and from 25 per cent to 15 per cent for new manufacturers. For firms such as Hindustan Unilever, Asian Paints, Nestle India, Bajaj Finance and HDFC Bank, the cuts meant a windfall. The BSE Sensex soared 5.3 per cent that day, and 2.8 per cent the following Monday, its biggest two-day rally in years. Yet, the enthusiasm faded quickly.

Why? Because the tax cuts were just a knee-jerk reaction, a desperate response to a flagging economy. Growth had slowed to 5 per cent in the first quarter of that year — 3.5 per cent according to old calculations. Exports were languishing, unemployment was rising, and auto sales had sunk to a two-decade low. The financial sector was in crisis, with shadow banks teetering. The tax bonanza was supposed to spur companies to reinvest their savings, leading to employment opportunities being generated. But higher retained earnings don't drive the expansion plans of cash-rich companies, only strong secular demand does. No wonder the generous tax cuts did not translate into corporate expansion.