Have you ever wondered why the Indian Why Government Reduce GST Rates? In this blog, I’ll explain the reasons behind the GST rate cut and who actually stands to benefit from it.
The government often changes the GST rate after some time, but this time the government has made big changes so that the common people and the middle class get some relief. A detailed article has already been written on how things become cheaper by changing the GST rate. Click here to read it.
The government says that by cutting GST rates, things will become a little cheaper, due to which people will buy more and the market will become a little faster. Whenever GST rates are cut, both products and services become cheaper. Due to which common people and middle-class people are able to buy more goods, and the sales of shops also increase.
I think by now you have understood why GST rate cuts happen. But before we go deeper, let me quickly give you a review of what GST actually is and why it is needed.
What is GST and Why Does it Matter?
What is GST?
In simple language GST is a type of tax. Whenever we buy any goods or service, we have to pay tax to the government. This is called GST. Before GST there were many different taxes like exercise, service, import, etc., but the Indian government simplified it and made it one which was named GST.
Why need GST?
Before GST, shopkeepers had a lot of difficulty in paying taxes. The government also had to face many problems in collecting taxes. That is why GST was introduced; this simplified the tax system a lot. Earlier there were many types of taxes. This made the goods even more expensive and it was difficult for common people and the middle class to understand it. Now with GST
- There is only one tax on goods and services: GST.
- Both paying tax and collecting tax have become easier
- The price of the products decreases a little
Why Government Reduce GST Rates?
Now let us talk about what would happen if the government had decreased the GST rates to such a large extent
Let’s understand heading by heading
1. To deal with the economic recession
India is a big friend of America and also of Russia. But India always buys oil from Russia, which America does not like. Even when America told its friends not to buy oil from Russia, India still bought oil from Russia and sold it refined to European countries.
The American President did not like this at all, so the American President (Mr Trump) imposed an additional tariff of 25% on India, due to which a huge impact was seen on Indian exports and may also be seen continuously.
Exports can also have a big and negative impact on India’s GDP. That is why the government has tried to increase internal demand by cutting GST rates so that people buy more goods and the shortfall in exports can be compensated by increasing it internally.
2. To increase consumer spending
This reason is slightly available only from the upper reason. The government believes that things will become cheaper with the cut in GST rates, due to which Indian people will buy more goods. This will bring more money into the market, the market will also remain positive, and shops will get more money. If money comes, income will increase. With an increase in income, expenses will decrease, and ultimately GDP will also increase.
3. keeping the elections in mind
The government often takes such decisions before elections so that people’s trust is built and the poor and middle-class people can get some relief. Cutting the GST rates is like giving a gift to the people. Like this time, the GST rates have been cut as a Diwali offer. Whatever GST rates have been cut, they will be implemented from 22-09-25. People become happy because of things becoming cheaper, and this has a huge positive impact during the elections.
In short, what are some main points of why the government reduced the GST rate cut?
1. To boost consumption
2. To support industries
3. To fight inflation
4. To win public trust/elections
Who Benefits the Most from GST rate Cuts?
Let’s understand heading by heading
1. Common people (poor & middle class)
When the government cuts the GST rate, the first benefit goes to the common man because the GST rate cut makes the things that are useful in daily life cheaper, like soap, hair oil, clothes and many more. This increases the profit of the people, and people are able to do more shopping. Due to this, the sales of shopkeepers also get a positive impact, and the market also starts growing.
2. Businesses (more sales)
The second biggest benefit of low GST rates is to businesses, whether they are small or big. As things become cheaper, people buy more goods, due to which the sales of businesses increase rapidly. The manufacturing company gets raw material a little cheaper, so the cost of making the goods also comes down. But this increases competition a little, and the profit margin increases. It is a very good opportunity for startups, small shops and MSMEs.
3. Specific sectors (cars, restaurants, FMCG)
Let’s understand the sector-wise details about it
A. Cars & automobiles
Because of the GST rate, the price of cars, bikes and other vehicles comes down a bit, due to which people do not face much difficulty in buying a new car. Because of the price, the middle class can buy a car easily and at a low price on EMI. For the middle class, a car is a big dream which is easy to fulfil. The sales of automobile companies increase rapidly. Due to sales, the profit automatically increases. When sales increase, then demand increases, then employment also increases because more people are needed to fulfil the demand.
B. Restaurants & food services
Due to the low GST rates on restaurants, hotels and food services, people plan to go out because the bills are not too expensive, which increases the sales of the restaurant. This entire sector gets a boost due to the low GST rates.
c. FMCG (fast moving consumer goods)
FMCG (soap, shampoo, toothpaste, snacks, etc.) which are essential in daily life, their prices decrease due to reduction in GST rates on these products. As a result, the monthly expenditure of every household reduces, the sales of small shops and small marts increase, and companies get more volume. This sector shows the maximum and quickest impact.
D. Government (better compliance, higher tax collection indirectly)
If the GST rates are low, then people like to buy more goods, and whenever they buy more goods, they will get the bill made. There is a great benefit of government tax compliance because people happily make payment with a proper bill due to cheap things. Cases of black money and tax evasion reduce significantly because every transaction is recorded. Startups and businesses also pay GST from time to time because they get input tax credit by paying GST. Due to this, the government indirectly gets more tax.
Real-life examples of GST reductions
Let’s take some examples.
EV (electric vehicles)
Suppose you went to buy an EV (Electric Vehicle), before the GST rate cut, the EV was kept in 12% slab
If the price of the EV is Rs 10,00,000 and there is also 12% profit, then the final price would be Rs 11,20,000.
But now, since the EV has been kept in a 5% slab, only Rs 50,000 will be taxed, and the final price will be Rs 1,050,000.
There will be a direct profit of Rs 70,000 from the GST rate cut.
ON RESTAURANT
Suppose you go to a hotel or restaurant to eat, and the bill is for Rs. 1000; then 18% tax is added separately, and the final cost comes to Rs. 1180.
But now after the GST rate cut, if the bill is for Rs. 1000, then only 5% tax will be levied, and the final bill will be for Rs. 1050. Directly there will be a profit of Rs. 130.
Impact of GST Cuts on the Economy in 2025
Let’s break into 3 parts.
Short-Term Impact
Things will become cheaper due to the GST rate cut, due to which demand in the market increases. Both the sales and profit of the shopkeepers increase, due to which GDP also grows very fast, and near the festival the impact becomes much faster and bigger.
Long-Term Impact
If demand continues to grow, companies will increase their production, which will increase employment. This will gradually boost the government’s tax collection, and even small shopkeepers will be able to get involved in the GST system.
Possible Challenges
The government will see a decline in tax revenue in the beginning due to the GST rate cut. Every state has to provide funds for development, which will put pressure on the budget. Some sectors may suffer losses due to non-receipt of ITC. If the GST rate is reduced significantly, then a fiscal deficit may be seen in the long term.
Need for Balance
The government has to maintain a balance between the GST rate and revenue, because if the GST rate is reduced too much, then the funding for government schemes will reduce, so before cutting the GST rate, the government will have to keep in mind the financial situation, elections or the needs of business.
Conclusion – What Should Consumers Expect Next?
Poor and middle-class people will see a slight fall in the prices of things in the coming time. Things used in daily life will also become cheaper due to the GST rate cut, and there will be a positive impact on the market. Due to Diwali, the price will see even sharper and bigger increases. The government can also give relief to other sectors if there is demand. Now people should buy smartly and get a proper bill on their purchase so that the tax system becomes stronger.
FAQs
Why does the government reduce GST rates?
The government is trying to increase the demand in the market by reducing the GST rate, which will make things cheaper. People will buy more goods, and the financial process will be faster. Also, there will be a positive impact from the election point of view.
Does GST reduction benefit consumers or businesses more?
Both benefit from the reduction in GST rates, but the middle class gets immediate relief as things become cheaper. Business sales increase, and they get new customers.
How does GST impact inflation?
When GST rates are reduced, the prices of things are reduced, which controls inflation to some extent. If more people buy goods, production increases and supply remains maintained, which reduces inflation to some extent.
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