On India’s Independence Day, Prime Minister Narendra Modi announced what he called a “gift” for consumers this Diwali in the form of long-awaited Goods and Services Tax (GST) 2.0 reforms. The announcement was expected to come from the Finance Minister, the chair of the all-powerful GST Council, but many got a surprise when the PM, on August 15, announced the upcoming GST reforms in keeping with his promise to reduce the rates before Diwali 2025, even before a formal approval from the council.
The government wants to move to a simplified tax structure of five and 18 percent, replacing the current tax rates of 12 percent and 28 percent. This move from the Modi government is meant to increase revenues amid rising concerns in Nepal regarding a surge in imports from India. During its 56th GST Council meeting, India proposed reducing the four main revenue slabs of the Goods and Services Tax (GST) to two main ones, after the US decided to impose a 50 percent tariff on most Indian products, apparently to increase revenues by increasing domestic consumption. Accordingly, the previous four slabs of 5, 12, 18 and 28 rates have come down to only two main slabs of 5 and 12 percent. As for some tobacco, pan masala products and expensive vehicles, GST has surged to 40 percent.
The council has reduced the rates for daily necessities, which were charging 18 percent GST, to five percent, covering more than 175 items, including toothpaste, talcum powder and shampoo.
Meanwhile, five percent remains the rate for items of daily consumption, other food items, FMCG and other items. What’s more, the Modi government has proposed reducing the GST from 12 to five percent on hotel bookings and cinema tickets. The council has proposed reducing the GST on medicines and medical supplies under health services, which are currently charging 12 percent to five percent.
If things go as planned, medicines used in the treatment of cancer will enjoy GST exemption along with personal health insurance and life insurance. According to Indian media, there is a possibility of reducing the GST from 12 to 5 percent by exempting products like paneer, pizza, bread, khakra, fruit juices, coconut water, butter, cheese, pasta and ice cream.
What’s more, the council has proposed a five percent GST on chemical fertilizers used in agriculture, clothes, solar panels, stationery, beauty products, umbrellas and shoes. Under the new scheme of things, the Modi government has proposed reducing GST to 18 percent from 28 percent on electronics like TV sets and AC equipment as well as on petrol hybrid cars.
If not implemented properly, the proposed two-rate structure of five percent and 18 percent could be a perfect opportunity for disaster with the 13 percentage point difference between the two rates turning out to be a golden opportunity for tax evaders. This huge difference in rates can also lead to an inverted tariff structure for almost all supplies, which is why it is assumed that input tax credit has been allowed for this slab.
The council’s decision will take effect once the Government of India publishes it in its gazette.
Meanwhile, Nepali experts and traders fear that the extensive changes in indirect tax rates in the form of GST on the part of India will adversely affect Nepal's industry and business.
At a time when the gray market is moving parallely in Nepal, the unauthorized import of cheap goods will increase even further, causing a negative impact on Nepal's industry and business sector, and subsequently on the overall revenue and the economy as a whole. Entrepreneurs warn that the Indian government’s move will pose a huge challenge to Nepal's industries that are producing essential goods.
The government should take adequate steps to protect relevant domestic industries from harmful effects of the Indian move.
