Modi accelerates major tax reform in India amid trade tensions with the US

Indian Prime Minister Narendra Modi confirmed on Sunday that his government has sent the proposed reform of the general consumption tax (GST) to the states, accelerating what is shaping up to be the country's largest fiscal restructuring since 2017.

During a public event in New Delhi on Sunday, Modi urged state governments to cooperate in implementing the changes before the Diwali festival in October.

"We are bringing in next-generation GST reforms. This will reduce the tax burden across the country," the president stated.

The festival season, which begins in October, is the busiest shopping period of the year in India. This is traditionally when families make their biggest purchases, from appliances and vehicles to clothing and gifts.

The initiative, which the prime minister has described as a "double bonus" for citizens, seeks to transform the current complex system of four tax brackets (5%, 12%, 18%, and 28%) into a simplified structure with just two main rates: a merit rate of 5% and a standard rate of 18%.

This reform is interpreted as a move to protect the Indian economy from global turbulence and position the country as a more attractive destination for foreign investment.

By simplifying one of the world's most complex tax systems, New Delhi seeks to dramatically improve its ranking in the Ease of Doing Business (EOD) rankings, a key factor for multinationals seeking to diversify their supply chains away from China.

The announcement comes at a time of heightened tensions with Washington, after President Donald Trump imposed a 50% tariff (in two tranches of 255 and 25%) on Indian products, and trade negotiations between the two countries have stalled.

In his Independence Day speech last Friday, Modi already called for more domestically produced goods, echoing calls for a boycott of American products.

Indian bank IDFC First Bank estimates that while the measure could boost GDP by 0.6% over 12 months, it will cost the state and federal governments about $20 billion annually.

Implementation of the measure now depends on reaching consensus with the states in the GST Council.

The sixth round of negotiations for a free trade agreement between India and the United States, scheduled for late August in New Delhi, could be postponed, an Indian official told media.

"This visit is likely to be rescheduled," the official told the Indian news agency PTI, referring to the team of US negotiators scheduled to arrive in the Indian capital on August 25 for a five-day round of talks, ending August 29.

To date, five rounds of negotiations for a Bilateral Trade Agreement (BTA) have been completed.

This possible postponement comes at a time when a second tranche of punitive tariffs from Washington is scheduled to take effect on August 27, bringing the total levy on many Indian products to 50%. The first tranche, at 25%, has been in effect since August 7.

The White House's justification for this second tranche of tariffs has been India's continued purchase of Russian oil. Since the invasion of Ukraine in 2022, India has dramatically increased its imports of discounted Russian crude, becoming one of its largest buyers globally.

Disagreement over reaching an agreement has increased due to India's refusal to yield to US pressure for greater market access in sectors such as agriculture and dairy, arguing that opening up these areas would affect the livelihoods of millions of small farmers.

Between April and July, Indian exports to the United States, its largest trading partner, increased by 21.6% to $33.53 billion, according to data from the Ministry of Commerce. Both countries had set a goal of doubling their bilateral trade to $500 billion by 2030.