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At a time when punitive tariffs from the United States threaten to squeeze exports and dampen investments, India has chosen to shield its economy by revamping the tax structure to stimulate domestic demand.

This is an unusual weapon to counter an external economic assault: providing cheaper goods for its citizens.

The Goods and Services Tax (GST) has often been criticised for its complexity, but it has now been pared down to simpler slabs of 5 and 18 per cent. A steep 40% rise has been imposed on sin goods such as cigarettes—hardly a move anyone will object to. The new GST is more than a technical correction; it is both a political and economic signal.

With global trade conditions uncertain, the GST change underscores the government’s intent to power India through this turbulence with domestic consumption.

The government is directly targeting the middle class and small businesses. Few measures send a clearer signal than lowering taxes on food items, school supplies, insurance, and household appliances—sectors most vulnerable to inflationary pressure and trade shocks. The timing, just ahead of the festive season, is no coincidence.

Household budgets will stretch further, traders will see higher volumes, and companies may record stronger earnings in the coming quarter. Stock markets have already responded with optimism.

Yet risks remain. States are staring at potential revenue shortfalls of up to $6 billion. For many, GST is the single largest revenue source, and replacing it with the hope of higher consumption is a gamble. Economic theory suggests that lower rates can expand the tax base, but such gains take time to materialise. The internal strain could be severe, particularly for states still grappling with post-pandemic fiscal pressures.

Politically, however, the move reinforces Prime Minister Narendra Modi’s pledge of a “tax bonanza” for the common man. Strategically, it sets India apart from a tit-for-tat trade war. Instead of raising barriers, New Delhi is opening wallets. By boosting domestic demand—which already accounts for about 60 per cent of GDP—the government is trying to build a buffer against tariff shocks.

The GST overhaul is both a shield and a stimulus. The chosen battlefield is not foreign trade, but the marketplace of India’s own citizens..