By Shanker Man Singh
One step forward, two back; it should not be the case that the medicine is more painful than the disease.
On Independence Day, Prime Minister Narendra Modi announced that there will be a gift for consumers this Diwali as he intends to roll out the long-awaited Goods and Services Tax (GST) 2.0 reforms. The announcement was expected to be made by the Finance Minister, who is the chairman of the all-powerful GST Council, but many were surprised that the Prime Minister chose to do so even before the formal approval from the Council. On August 15, 2025, Prime Minister Modi announced the upcoming GST reforms. Modi will recall that he promised to reduce rates before Diwali 2025.
The government wants to move to a simplified tax structure of 5% and 18%, replacing the current tax rates of 12% and 28%. In this way, India’s new strategy to increase revenue after the US’s high tariffs is naturally causing concerns about illegal imports of goods in Nepal.
Neighboring country India has proposed to reduce the four main revenue slabs of the Goods and Services Tax (GST) to two main ones. At a glance, it seems that the 56th GST Council meeting of India has made such a proposal with the aim of making essential goods cheaper.
After the US decided to impose a 50 percent tariff on most Indian products, it is understood that India has made such a proposal with the aim of increasing revenue by increasing domestic consumption. Accordingly, the previous four slabs of 5, 12, 18 and 28 rates have been reduced to only the main two, 5 and 12 percent. However, for some tobacco, pan masala and expensive vehicles, the Indian government has increased their GST to 40 percent by calling them a cess.
The Council has reduced the rate of daily necessities, which were charged 18 percent GST, to 5 percent. It is said that there are more than 175 such items, including toothpaste, talcum powder, and shampoo.
Five percent remains on daily consumption items, other food items, FMCG and other items. It has also been proposed to reduce the GST from 12 to 5 percent on hotel bookings and cinema tickets in the hospitality and entertainment sector. It is proposed to reduce the GST on medicines and medical supplies under health services, which are currently charged at 12 percent, to 5 percent.
It is also proposed to exempt medicines used in the treatment of cancer from GST. Similarly, personal health insurance and life insurance are also likely to be exempt from GST. According to Indian media, there is a possibility of reducing the GST from 12 to 5 or exempting paneer, pizza, bread, khakra, fruit juices, coconut water, butter, cheese, pasta, ice cream, etc., which are currently charging 12 percent.
Similarly, 5 percent has also been proposed for chemical fertilizers used in agriculture, clothes, solar panels, stationery, beauty products, umbrellas and shoes.
With the aim of increasing business during the upcoming festivals, the GST rate on electronic TVs and ACs has been proposed to be reduced from 28 to 18 percent.
To encourage green transport, the GST on petrol hybrid cars has also been reduced. Accordingly, the GST on such cars has been proposed to be reduced from 28 to 18 percent.
However, the proposed two-rate structure of 5% and 18% could be a perfect opportunity for disaster if not implemented properly.
The 13 percentage point difference between the two rates could itself be an opportunity for tax evaders. This huge difference in rates can also lead to an inverted tariff structure for almost all supplies, which is why it is assumed that input tax credit has been allowed for this slab.
This decision of the Council will come into effect only after the Government of India publishes it in its Gazette.
Nepalese experts and traders are of the view that the extensive changes of indirect tax rates in the form of GST by the Government of India will adversely affect Nepal’s industry and business.
It is said that when the gray market is moving in parallel in Nepal, will the unauthorized import of these goods increase even more if Indian products become cheaper?
As a result, Nepal should be aware of the negative impact this move will have on Nepal’s industry and business and subsequently on the overall revenue and state structure. Entrepreneurs have said that the new decision of the Government of the neighboring country, India, will pose a big challenge to Nepal’s industries that are producing essential goods.
According to their argument, how can goods that have to pay 13 percent VAT in Nepal compete after India has made GST 5 percent on essential goods? Since that is the case, the they are of the opinion that it may be forced to either reduce the VAT rate or even introduce a multi-rate VAT to make essential goods cheaper.
The government of neighboring India has announced that it will reduce the Goods and Services Tax (GST) to two rates. To put it briefly, the GST implemented eight years ago in 2017 had four rates – 5%, 12%, 18%, and 28%. Now, it has been announced that it will be limited to only two rates – 5% and 18%.
The exact date when the new tax rates will be implemented has not been announced. However, it is expected that the implementation of these rates will be implemented just before Diwali. Because some time ago, Indian Prime Minister Narendra Modi, while addressing the occasion of India’s Independence Day, announced the adjustment of GST rates as a ‘Diwali gift’, announcing a significant reduction in tax rates on items used by the common man.
In Nepal, VAT is currently levied on all but a few basic necessities at 13 percent. In the case of businessmen, there are two thresholds for VAT to be levied on transactions – a total sales limit of Rs 5 million for those dealing in goods only and a total sales limit of Rs 3 million for those dealing in services.
Transactions above that attract VAT. There must be long-term clarity on rates and policies to build industry confidence and support business planning. In neighboring India, about 90% of the items currently in the 28% slab are likely to be moved to the 18% slab.
About 99% of the items in the 12% slab are expected to be moved to the 5% slab.
By Diwali 2025, when the effects of the changes in the GST law will start to take effect, it is natural for both businesses and consumers to expect a more efficient, transparent and growth-oriented tax system. This is also a matter of concern for multinational companies operating in Nepal.
The daily consumption goods manufacturing industry operating in Nepal has expressed its concern over India’s new GST proposal and expressed its hope that they will have to take a new strategy for the future of its businesses.
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