The GST cut will result in cheaper consumer products and boost consumption in the South Asian country

India plans to reduce its consumption tax by October when the country celebrates Diwali, the Hindu festival of lights, Prime Minister Narendra Modi has said.

In its biggest tax overhaul since 2017, the South Asian country plans to introduce a two-tier tax structure with rates of 5% and 18%, replacing a four-tier system which has a top rate of 28%.

In his Independence Day speech on Friday, Modi said the goods and services tax (GST) would be reformed and taxes lowered by Diwali, which coincides with the South Asian nation’s largest shopping period.

Modi has requested that Indian states approve the draft of the “next-generation” GST reforms, the Times of India reported on Sunday.

The Indian government’s goal is to reduce taxes on 99% of items currently in the 12% bracket to 5%, a government official told Reuters. This change will impact a range of products, including daily essentials. Electronic items are also expected to become cheaper, with a reduction in GST from 18% to 12%.

As India deals with US plans to hit Indian imports with a 50% tariff from August 27, Indian manufacturers could offset a potential fall in exports with an increase in domestic consumption. In his speech on Friday, Modi called on Indians to buy more locally-made products.

The new two-tier tax structure aims to address the twin objective of making rates and processes simpler as well as more rational, The Hindu said, citing government sources.

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“Reduced rates will not lead to reduced revenues, and we expect compliance and collection going higher,” an official told The Hindu, adding that the lower tax brackets will be “fiscally sustainable.”

New Delhi is also looking to reduce the GST on small petrol and diesel cars and cut taxes on health and life insurance premiums to 5% or possibly zero, a Reuters report said.

The cuts are expected to boost India’s GDP growth rate 0.6% annually, but the country’s state and federal governments could lose up to $20 billion in GST revenues, Reuters cited IDFC Bank as saying.

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India proposes tax overhaul ahead of major holiday

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