India’s GST overhaul to hit Nepali industries: Illegal imports and competitive pressure loom large

KATHMANDU: India’s Goods and Services Tax (GST) Council has introduced sweeping changes in its indirect tax structure, reducing four existing tax slabs—5%, 12%, 18%, and 28%—into two principal slabs of 5% and 12%. The landmark decision, taken during the Council’s 56th meeting that began on Wednesday, is aimed at making essential goods cheaper and boosting domestic consumption.

The reform comes against the backdrop of the United States imposing a steep 50 percent tariff on most Indian products. To counter this and drive internal revenue growth, the Indian government is banking on increased domestic demand and simplified taxation. Prime Minister Narendra Modi had earlier hinted at a GST overhaul, calling it a festive “gift” to traders ahead of Diwali.

Key Features of the New GST Structure

Essential goods such as toothpaste, shampoo, talcum powder, and other FMCG items (over 175 products) will see rates reduced from 18% to 5%.

Clothing, food products, and other FMCG items will remain at 5%.

Hospitality and entertainment, including hotel bookings and cinema tickets, will drop from 12% to 5%.

Medicines and medical supplies will be reduced from 12% to 5%, while cancer medicines may even be GST-free.

Personal health and life insurance could also become GST-exempt.

Dairy and processed foods like paneer, bread, pizza, juices, butter, cheese, pasta, and ice cream may be reduced from 12% to 5% or exempted entirely.

Agricultural inputs such as fertilizers, solar stoves, textiles, stationery, and footwear will be taxed at 5%.

Electronics such as TVs and air conditioners will drop from 28% to 18%, ahead of the festive season.

Hybrid vehicles will also see a reduction from 28% to 18%, to promote green transport.

Luxury cars such as Tesla, Mercedes-Benz, and BMW priced above USD 46,000 will face a special cess, bringing their GST to 40%.

The State Bank of India has projected that the changes will boost state revenues by an additional INR 1.41 trillion, with every Indian state becoming a “net gainer.”

Concerns for Nepal: Rising Threat of Illegal Imports

While the GST reform is expected to strengthen India’s economy, its impact on Nepal could be severe. With Indian goods becoming cheaper due to lower GST rates, Nepali industries face mounting challenges.

Nepal’s domestic manufacturers already struggle with both legal and illegal imports from India. The new tax regime widens this gap, raising fears of an influx of cheaper goods into Nepal’s grey market.

Anupam Rathi, President of the Morang Industry Association, warned, “Illegal and parallel imports from India already pose a serious threat. Now, with essential goods taxed at only 5% in India while Nepal still imposes 13% VAT, how can Nepali industries compete?”

Rathi urged the Nepali government to reconsider its VAT structure—either lowering the rate or adopting a multi-slab system to make essential goods more affordable domestically.

Multinational Companies Voice Alarm

Multinational companies operating in Nepal, such as Dabur Nepal and Hindustan Unilever Nepal, which produce daily consumer goods, have expressed deep concern about India’s GST cuts.

A senior official from Unilever Nepal told Fiscal Nepal, “The moment India makes essential goods cheaper, our products here will be hit hard. Even official imports will undercut us because of at least an 8% tax gap between India’s 5% GST and Nepal’s 13% VAT. That difference is significant.”

He further warned that unless Nepal reforms its VAT policy, not only will industrial operations suffer, but national revenue and the broader economy could also face serious risks.

Nepali Perspective: Policy Reforms Needed Urgently

Nepal’s reliance on cross-border trade with India means that any major Indian tax reform directly impacts Nepal’s market. With GST cuts lowering the price of daily essentials, Nepal risks:

-A rise in illegal imports from India through grey markets,

-Competitive disadvantages for domestic manufacturers,

-A potential decline in government revenue as customers shift to cheaper Indian goods,

-Pressure on multinational and local industries, particularly in FMCG and essential goods sectors.

Economic experts stress that Nepal must urgently revisit its tax regime. Without adjustments, Nepali industries could lose market share to cheaper Indian products, undermining the country’s industrial base and economic stability.

As India celebrates consumer-friendly reforms, Nepal is left grappling with the unintended consequences of its neighbor’s tax strategy—a scenario that could reshape trade dynamics along the open border in the months ahead.