The two-slab Goods and Services Tax (GST) structure that sets in tomorrow (September 22) is expected to benefit both Indian exporters as well as importers across several key sectors.

While the standard rate of 18% and a merit rate of 5% (and a special de-merit rate of 40% for a select few goods and services) are expected to lower the tax incidence in most products, simplification of measures related to GST compliance are to improve the ease of doing business in the country.

Impact on exports

According to the Commerce Ministry, the reduction of GST rate from 12% to 5% on paper and packaging will make cartons, cases, trays etc cheaper and in the process lower packaging costs for the exporters. Similarly, employment intensive export sectors like leather and footwear, handicrafts, wood and agro-based industries will all be benefited from the lower taxation (all from 12% to 5%) and reduce some cost disadvantage arising out of high tariffs (particularly by the US).

Similarly, lower tax (from 28% to 18%) on commercial vehicles like trucks and delivery vans could result in lower freight and logistics costs.

The removal of the threshold of ₹1,000 on GST refunds for e-commerce exporters and eligibility for small ticket exporters for full automated refunds are expected to expand MSME participation in cross border e-commerce and also boost competitiveness of such exports.

In general, faster GST refunds through an automated export refund system to be operational from Nov 1, and 90% upfront refund within 7 days, risk based automated verification of refunds, and increased liquidity, reduced working capital stress, and real time compliance checks are expected to help exporters in the GST 2.O regime.

Impact on import

Meanwhile, impact of reduction in GST on imports is broadly seen as an attempt to ease cost pressures across critical sectors. The removal of inverted duty structure in several key sectors like MMF (textile), yarn, paper, leather, tractor parts, toys, handicrafts etc are specifically meant to lower GST on raw materials and intermediaries.

Once fibre-yarn-fabric rates get aligned tax distortions in textiles are expected to end benefitting both domestic and export sectors.

An analysis done by Delhi based Global Trade Research Institute (GTRI) observes that by lowering taxes on agri-food inputs and raw materials, the government aims to curb inflation in essential commodities. Similarly, reduced rates on chemicals and healthcare products are intended to make medical treatment more affordable and improve access to vital supplies.

Selected electronics and industrial parts have also been given relief to strengthen domestic manufacturing, while reductions on capital goods and maintenance, repair and overhaul (MRO) items are designed to support fresh investments, industrial expansion, and cost-effective upkeep of machinery.

The reduction in GST on almonds (in shell) from 12% to 5%, once directly pass-through to retail, will help both end consumer as well as exporters in the U.S. While reduction in the rate of cocoa & cocoa preparations from 18% to 5% will reduce manufacturing costs for FMCG and hotel and restaurant industry, rate cut on cashew nuts (12% TO 5%) will reduce the cost for processors and confectionery sector.

GST rate increases also have an impact. GTRI points out that these were meant to partially offset cut-side losses, focus on energy and categories with greater downstream credit.

The increase in the GST on coal from 5% to 18% could thus increase costs for power utilities and furnaces. With coal powering 75% of India’s electricity needs, downstream industries like steel, cement, aluminium etc could also see some pricing pressures. “With imports accounting for nearly one-fourth of GST revenues, these changes underscore how tax policy at the border reverberates across supply chains, consumer prices, and the fiscal balance”, says Ajay Srivastava, founder GTRI.

Along with auto-filled GST returns, real time invoice matching, automated cross-verification between customs and GST filings etc, GST 2.O is expected to be more export friendly.

As Federation of Indian Export Organisations (FIEO) notes, such measures will not only strengthen India’s export sector but also give rise to increased domestic demand by easing stress on supply chains. “A robust export ecosystem inevitably supports domestic manufacturing and consumption. These steps will create a positive multiplier effect across the economy, benefitting both industry and consumers”, says SC Ralhan President, FIEO.