Most anticipated GST Council decision: How Nirmala Sitharaman responds to Trump's 50% tariff

The 56th GST Council meeting, chaired by Finance Minister Nirmala Sitharaman and attended by state finance ministers, is underway in New Delhi on September 3-4, with a key focus on rate rationalisation as part of "next-generation" GST reforms. While no final decisions have been announced yet, the most anticipated outcome—directly addressing your query on countering United States President Donald Trump's tariffs—is the approval of a simplified dual-slab structure (5% for essentials and 18% for most other goods, with a 40% rate for 6-7 sin/demerit items like tobacco and luxury goods). 

This overhaul, endorsed in principle by a Group of Ministers (GoM) last month, is explicitly positioned by the government as a strategic response to the US's 50% tariffs (a 25% reciprocal duty plus a 25% penalty for India's Russian oil imports, effective August 27), which threaten $48-60 billion in Indian exports, primarily labor-intensive sectors like textiles, gems/jewellery, apparel, shrimp, leather and auto parts. 

These tariffs, invoked under the US International Emergency Economic Powers Act (IEEPA) and other statutes, could shave 0.2-0.9% off India's GDP growth (likely to drop FY26 projections from 6.5-7% to under 6%), exacerbate job losses in export hubs like Surat, Tiruppur, and Agra and widen the current account deficit by making Indian goods 30-35% less competitive against rivals like Vietnam, Bangladesh and China.

The US has exempted pharmaceuticals ($8.7 billion in exports), electronics, and some autos for now. Still, broader coverage could follow, with legal challenges to the tariffs ongoing (a federal appeals court has stayed a lower court's ruling deeming some IEEPA tariffs illegal, with arguments set for July 31, 2025, possibly escalating to the Supreme Court).

How proposed GST reforms link to tariffs, provide relief: Explained

GST and tariffs are interconnected for exporters because GST is levied on domestic supplies and inputs. In contrast, exports are zero-rated, with refunds for input tax credits available through mechanisms such as IGST refunds or the Rebate of State and Central Taxes and Levies (RoSCTL). High US tariffs make Indian exports uncompetitive by inflating end prices for US buyers, which may slash demand by 20-70% in affected sectors and force exporters to absorb costs, cut margins, or lose market share. 

The current four-slab GST (5%, 12%, 18%, 28%) creates "inverted duty structures" where inputs are taxed higher than outputs, blocking full refunds and raising costs by 2-5% for exporters—compounding tariff pain. The proposed reforms aim to mitigate this by:

• Reducing average GST incidence: From ~11.5% to under 10%, easing input costs and improving refund efficiency for exporters. This could lower effective export costs by 1-2%, partially offsetting the 30-35% tariff disadvantage.
• Boosting domestic consumption to offset export losses: With exports to the US at ~18% of India's total ($87 billion annually, or 2.2% of GDP), the reforms target India's 60% consumption-driven economy by making ~175 items cheaper, injecting ₹2-2.5 lakh crore ($25-30 billion) into spending and adding 0.3-0.6% to GDP growth—enough to cushion 70-100% of the tariff drag in the short term. Private final consumption expenditure (PFCE, 52-53% of GDP) is projected to grow 6.9% in FY26, supported by lower prices on essentials.
• Targeted relief for exporters and affected sectors: The GoM proposes exempting health/life insurance premiums (18% GST, costing ₹9,700 crore annually but aiding MSMEs and workers in export sectors) and zero-rating more farm/agri inputs to support textiles/leather (e.g., cotton duty exemptions extended to December 2025). EVs could receive a flat 5% rate to boost adoption and offset the impact of auto export hits, while textiles/auto parts may see inverted duty rates. Sitharaman has convened inter-ministerial meetings to discuss exporter support, including faster GST refunds and RoSCTL enhancements.

Policies for alternative export destinations and broader relief

The council is unlikely to announce direct trade pacts today (those fall under Commerce Minister Piyush Goyal's purview). However, Sitharaman has stressed diversification as a pillar of relief, with the government allocating ₹25,000 crore for an Export Promotion Mission to fund market access, compliance, and e-commerce hubs in 40 countries (e.g., UK, EU, Japan, South Korea, UAE, Latin America, Africa, ASEAN). 

Recent FTAs (e.g., the UK signed July 2025 for 99% duty-free access, EU effective October 2025 for textiles/chemicals, Australia for 85% tariff-free) and outreach to Mercosur/Gulf nations aim to redirect 20-30% of US-bound goods, targeting $590 billion in global textile/apparel imports where India's share is just 5-6%. Additional measures include:

• Financial support: ₹20,000 crore export fund (launching September 2025) for working capital/insurance; interest subvention under the Interest Equalisation Scheme for MSMEs; 12-month loan moratorium; 30% boost to Emergency Credit Line Guarantee; collateral-free lending.
• No retaliation but diplomacy: India has rejected retaliatory tariffs to avoid escalation, opting for negotiations (e.g., Trump claimed India offered zero tariffs on US goods, but warned "it's getting late"; informal talks ongoing, with a probable deal by Q3 end). Prime Minister Narendra Modi has urged the "Vocal for Local" initiative to prioritise domestic sales. At the same time, RBI Governor Sanjay Malhotra pledged rupee internationalisation (e.g., deals with the UAE, Mauritius) to shield the country from forex volatility.
• Revenue neutrality and challenges: The reforms could cost ₹80,000-₹1.8 lakh crore annually (split Centre-states), with opposition states (e.g., Tamil Nadu, Punjab) demanding 5-year compensation and a Health/Green Energy Cess on sin goods to offset losses. Sitharaman has assured a review for revenue neutrality, with implementation targeted for Navratri (September 22) to capitalise on festive demand, although the pass-through to consumers may take 1-3 months.

Economists like those at Ambit Capital and ICRA view this as a "masterstroke" for resilience, with rural incomes, low inflation (8-year low), and RBI rate cuts (100 bps since February) providing buffers. However, complete tariff mitigation requires swift diversification and negotiations. 

The Central Board of Indirect Taxes and Customs (CBIC) has warned against speculation to avoid market volatility. Still, approval seems likely given the Centre's ~33% voting power and support from BJP-ruled states. If passed, this could be politically crucial ahead of state elections, signalling a revival in consumption amid "economic selfishness" (as Modi termed global tariffs).