Will GST 2.0 boost overall consumption?
With lower GST rates kicking in this week, and auto majors like Maruti and Hyundai reporting record one-day sales ever, the excitement around GST rate cuts is palpable. The first-day effect was clearly a result of pent-up demand, with consumers waiting until the lower GST rates kicked in, but the broader question is whether this marks the start of a lasting private consumption boom and what costs are we paying to sustain this consumption boost?
Let’s first decode arguments in favour of the GST rate revamp. First, simplifying the GST slab structure was long overdue. With over 90 per cent of items now taxed at either 5 per cent or 18 per cent, compliance becomes simpler. The rate revamp also corrected for duty inversion in specific sectors, particularly in the fertilizer industry.
Second, the move extends the government’s middle-class relief efforts, following last year’s income tax reform that made income up to Rs.12 lakh tax-free. Crucially, GST cuts reach the bottom of the pyramid more effectively than income tax relief.
