Welcome to yet another edition, chief!

In today’s edition — Like in the GST 2.0, several countries across the globe have reduced their VAT (value-added tax) rates in the past to boost consumption and fire up their economies. But studies show that the outcome of these tax cuts seldom met expectations. The valuable lessons from the world’s ambitious changes in their VAT may help India reset its expectations from the recent tax cuts and also know what to do and what not to do.

Global Lessons On GST: What India Can Expect

Vishwas Ved

News of a tax cut makes everyone feel good, but such reductions – even steep ones – may not always make your wallet fatter. 

GST 2.0 is already in action and prices of scores of day-to-day essential items have come down and two-wheelers and cars are considerably cheaper.

After this, it's not at all unreasonable to entertain the thought that the GST cut would eventually leave us with more money at the end of the month. 

But it's not as simple as that. Whether we are actually left with more disposable income or not largely depends on how much of the cut is passed on by companies.

So, before we get too excited, it’s worth looking at how other countries have played the game of raising and cutting consumption taxes, and what their experiences can teach us.

The International Playbook

Governments across the world occasionally alter consumption-related tax or value-added tax (VAT) rates.

A report by Crisil released last week suggests that the impact of VAT/GST tax changes across the world is more “nuanced”. Let’s compare how passthrough has worked for other countries and what India can expect.

In 2009, France cut VAT on spendings at restaurants from 19.6% to 5.5% following a drop in the number of people going out to eat. The drop in VAT was expected to make dining more affordable to both French citizens and tourists.

But most restaurant owners retained a chunk of the benefit for themselves. As a result, prices more or less stayed the same and no real jump in eating out was reported. 

In fact, a 2017 study by NBER, a US-based research organisation, found that consumers received only 25% of the benefit, while employees and suppliers received 16% and 41%, respectively, with the remaining 41% benefiting restaurant owners.

Similarly, during the Covid pandemic in 2020, Germany cut VAT temporarily from 19% to 16%. Businesses passed on some of it, and while the impact wasn’t huge, it did give families a little breathing space at a tough time.

Japan’s story, on the other hand, is a warning sign. Every time it hiked consumption taxes, spending fell sharply, especially on cars and appliances. 

The country increased its tax rate from 5% to 8% in April 2014, and from 8% to 10% in October 2019. Both hikes were followed by a decline in consumer spending.

For instance, following the 2014 tax hike, a major department store reported a 25% drop in sales of luxury items and appliances.

Since India has brought in a 40% “sin slab” and raised taxes on luxury goods, it might want to pick up a few lessons from Japan as well.

How Consumers Really Respond

Studies also provide evidence that consumers adjust their spending behavior in response to announced tax changes. 

A 2021 report by the American Economic Association reveals that customers tend to stock up on storable goods before taxes rise and increase online and cross-border shopping in both the short and long run.

Simply put, people usually don’t just react after a tax change; they often plan in advance. If a cut is announced, they delay purchases until it’s in the price. If a hike is coming, they rush to buy before prices rise.

Durable goods like cars, bikes and TVs are the most affected. Even a small change in tax can influence the decision. For food and everyday items, the response is smaller but still noticeable.

That’s why the GST tax cuts on cars, two-wheelers and TVs matter. If companies pass the savings on, demand in these categories could pick up quickly. If not, the cuts may just fatten company margins instead of consumer wallets.

India’s Unique Position

The difference with India is that this reform is structural, not temporary. The government has simplified the system from four slabs to two, while making essentials and some discretionary goods cheaper. 

CRISIL estimates the average GST rate on the top 30 items in a household’s budget has dropped from about 11% to 9%. Nearly half the consumer basket is now tax-free.

Still, the benefits won’t show up overnight. Passthrough takes time. In many countries, only a part of the tax cut reaches consumers, and often with a delay of months. India may see the same.

On the brighter side, GST 2.0 comes at the right moment. Inflation is low, the RBI has cut rates, rural incomes look healthy after good harvests, and income-tax relief has already put more money in the middle class’s pocket. 

Put together, these give households more space to spend.

Final Words

Global lessons are clear: tax cuts alone don’t boost spending unless the savings reach consumers. The passthrough has to happen simultaneously. 

To be fair, the government has already told businesses to keep passing on the benefits of the tax cut. But it should not stop there. It needs to keep an eye on timely compliance, especially in sectors that don’t attract as much attention or headlines as autos and electronics.

For India, the opportunity is big. If businesses pass on the benefits quickly, GST 2.0 could give a real, lasting push to household demand. 

If they don’t, the reform may end up as just another well-meaning policy with little impact on everyday life.

12,000

That’s the number of jobs tech consultancy Accenture intends to add at its new campus planned in Andhra Pradesh. India is already Accenture's largest employee base globally, with more than 300,000 of its 790,000 employees based in the country.  It is not immediately clear how much Accenture intends to invest in setting up the campus. TCS and Cognizant secured land leases under the policy to build campuses that could generate around 20,000 jobs in Visakhapatnam. Cognizant will invest $183 million, while TCS has earmarked slightly over $154 million for its facility.

—Air India to operate 20 weekly flights from Navi Mumbai airport. The Air India Group announced this week that it will launch commercial operations from the upcoming Navi Mumbai International Airport (NMIA) through its subsidiary Air India Express, starting with 20 daily departures in the initial phase. Operations will be gradually scaled up to 55 daily departures, including up to five international flights, by mid-2026. Previously, IndiGo announced it will be the first carrier to operate from NMIA with 18 daily departures, increasing to 79. Akasa Air too had committed to begin with about 15 daily domestic flights, expanding to over 40 domestic services and 8-10 international routes within a year.

—Amazon faces trial in US for ‘duping’ people. Amazon faces a court hearing in Seattle this week to face allegations by federal regulators that the e-commerce giant duped customers into signing up for its Prime membership while also making it difficult for them to cancel their subscriptions. The case centers on claims that Amazon engaged in what the agency said amounted to a “years-long effort” to trick millions of customers into automatically renewing their Prime subscriptions, specifically by using user-interface designs that were “manipulative, coercive or deceptive.”

—US asks judge to break up Google’s ad monopoly. The Justice Department said this week that Google should be broken up to address its monopoly in advertising technology, kicking off a hearing that could reshape the technology giant’s power online. A judge ruled in April that Google had built a monopoly over tools that websites use to sell ad space. Google also monopolised the software that connects those publishers with markets looking to buy space, she said. Google’s lawyers argued that the proposals were extreme and offered modest changes to the company’s advertising software that would benefit publishers.

—Now, you can speak to Google Photos for editing help. Android users are now able to edit their photos with AI, Google announced this week. In Google Photos, users will be able to talk to the AI using natural language to describe how they want to edit their photo via either voice or text. The feature is designed to make it easier to edit photos without having to understand which editing tools to use or where they can be found in the app. The Gemini-powered feature was initially made available to those with the newly launched Pixel 10 devices in the US, introduced in August.

ICYMI | Whine and Dine

Missed last week's update? The GST 2.0 move has set off a ₹6 lakh crore market rally, but the gains aren’t evenly spread. Autos and consumer durables are on a high, dining on delectables brought forth by GST cuts, while insurers are whining because it’s going to affect their profit margins. We look at how the new normal in taxation is reshaping India’s consumption story in uneven ways.

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