Rising tariffs and increased taxes on capital market transactions add layers of contradiction to the tax reform narrative. Representative photo: iStock
Centre’s indirect tax reforms yielded limited gains, did little to boost growth
While design, implementation flaws derailed GST, protectionist tariffs damaged export competitiveness, attracting reciprocal tariffs from US. Second of a two-part series
Much before the cut in corporation and personal income tax, the Centre had abolished wealth tax in the 2015 budget. The wealth tax collection was low – Rs 788 crore, Rs 846 crore, and Rs 1,008 crore in FY12, FY13, and FY14, respectively – and earlier tax reform bodies had called for its abolition due to disproportionately high administrative and compliance costs (RJ Chelliah committee and Vijay Kelkar task force).
Instead, the budget announced an additional surcharge of 2 per cent on the super-rich (taxable income of over Rs 1 crore), which was later withdrawn due to protests.
Key I-T reforms
Earlier this month, the entire Income Tax Act of 1961 (applicable to both corporate and personal income tax) was recast – simplifying the language and structure. The number of words and chapters was nearly halved, the chapters more than halved, and sections reduced by 65 per cent.
Further, the law is being amended (passed by the Lok Sabha) to provide an exemption to Saudi Arabia’s sovereign fund PIF (Public Investment Fund and its subsidiaries) from dividend, interest, and long-term capital gains – a first such concession in the Income Tax Act – to generate FPI inflows.
This follows the prime minister’s visit to Saudi Arabia in April 2025. The PIF is likely to set up an office in Gujarat’s GIFT City. The FPI rules cap all such funds to listed entities clubbed together at 10 per cent. The PIF is exempt from this cap.
The other amendments include relief from deemed rent on vacant houses to promote the housing sector – by removing conditionalities attached to treating property as self-occupied and increased threshold for TDS on rent paid by non-individuals (like corporations) – and abatement of all assessments for block periods in search cases (which is automatic) until such block assessment is specifically order.
Did tax cuts boost consumption?
‘Real’ growth in demand (PFCE) averages 6.1 per cent during FY15-FY25 – below 6.2 per cent in GDP. ‘Real’ growth in manufacturing GVA too is at 6.1 per cent during the same period and below that of GDP’s growth.
In fact, consumption and manufacturing are dragging down growth, rather than pulling it up. Until quality jobs are created and wages rise, mere lowering of tax rates alone may not boost consumption. Chief Economic Advisor VA Nageswaran had called out India Inc. in December 2024 for not creating quality jobs or raising salaries/wages despite a 15-year high profit-to-GDP ratio in FY24.
Drop in household savings
Is the tax cut then leading to higher household savings? The answer is ‘no’.
The National Accounts Statistics show household savings dropped from 23.6 per cent of GDP in FY12 to 18.1 per cent in FY24 while household debts (annual change or “flow”) climbed up from 3.3 per cent of GDP to 6.2 per cent in FY24 and household net financial assets plunged to more than 40 years low of 5 per cent of GDP in FY23 and 5.3 per cent in FY24, up to which data is available (current prices).
This contradictory scenario (neither higher consumption nor savings) calls for a detailed study to know exactly what happened to the income tax reliefs.
GST reforms revive state-Centre tensions
The GST subsumed eight central and nine state indirect taxes, not all. Several high-value items like petrol and petroleum products, alcohol for human consumption, were left out, and the GST's applicability to electricity and real estate is partial (some elements are under the GST but not others).
Such a design was adopted to make states quickly agree to give up their rights to most indirect taxes. Compensation and annual hike in compensation also helped persuade states. Thus, the rollout was partial, and the rate structures were complex to accommodate the differing interests of states.
If the 2017 introduction was hurried, the Centre’s announcement of a major rejig before Diwali is a surprise. It has created fresh tension between the Centre and states as states face revenue loss, and demands for compensation are on the cards.
Along with these tax reforms, the Centre did something quite contradictory: It raised tariff walls (tax against imports) – another component of indirect tax.
Tariff rollback
The Centre reversed the 1991 trade liberalisation and erected tariff walls to protect domestic industries from global competition – a step that goes against its incentives to boost exports and diversification attempts in view of the US’s 25 per cent reciprocal tariff and 25 per cent sanctions for importing Russian oil.
Lower tariffs had served India well. Subramanian had pointed out in 2020 how ‘real’ export growth went up to 11 per cent during 1992-2019, against 4.5 per cent during 1952-1991, boosting GDP growth to 6.5 per cent, against 3.5 per cent, in the corresponding periods.
India began to roll back its tariff when Donald Trump became the US President again earlier this year. He called India “tariff king” and threatened a reciprocal tariff. In response India cut tariffs on several items in the February 2025 budget – from high-end motorcycles, cars, and smartphone parts to industrial inputs and waste imports to placate the US.
Later, it also cut duty on bourbon whiskey originating from the US and eliminated the 6 per cent equalisation levy (Google tax).
In its FTA with the UK, India lowered the average tariff to 3 per cent on goods, from 15 per cent, covering 90 per cent of goods imported from the UK. In return, the UK eliminated tariffs on 99 per cent of items from India, including those which already enjoyed zero-tariff.
Security transaction taxes go up
The July 2024 budget saw the Centre raising tax on security transactions (STT), particularly in F&O, which the finance minister called a “very speculative area”, and also long-term capital gains (LTCG). These were aimed at winning away households from the capital markets.
The Economic Survey of 2023-24 had said 20 per cent of households had shifted their savings to capital markets.
The RBI and SEBI had warned that this shift, particularly to F&O, threatened to hurt capital formation and growth.
A month after the budget, the SEBI published its study saying, “93 per cent of individual traders incurred losses in equity F&O between FY22 and FY24” – up from its 2022 study which had found 85 per cent and 89 per cent individual traders had booked loss in F&O in FY19 and FY22, respectively.
The budget documents show that during FY13-FY26 (BE) growth in corporation tax averaged 10.2 per cent, personal income tax 16.9 per cent, and total indirect tax (GST, customs, excise, and others) 11.5 per cent.
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