Can GST 2.0 Save India from Trump’s Tariff Shock? What Consumers Must Know

On August 27, 2025 (9:30 am IST), Washington begins levying an additional 25% duty on Indian goods, taking the overall tariff rate to 50%. The draft order by the US Department of Homeland Security makes clear: all goods “entered for consumption” from this hour onward will face the punitive hike.

Trump’s Tariff Shock Lands Today
This marks the sharpest escalation in trade tensions between India and the U.S. in years. The trigger, according to Washington, is India’s continued purchase of discounted Russian crude. But the fallout is far wider: sectors spanning gems and jewellery, textiles, auto components, agricultural goods, and seafood are directly in the firing line.

The U.S. imported $60.85 billion worth of goods from India last year. With nearly 70% of this basket now subject to a 50% duty, the blow is serious. In pure GDP terms, the hit equals ~1.56% of India’s output and 7.38% of total exports. But the pain is not evenly distributed; it is acute in labour-intensive industries, where margins are slim and jobs plentiful.

Exports at Risk: Sectoral Breakdown
Gems & Jewellery: The U.S. is India’s largest jewellery buyer, accounting for $10 billion in shipments. Tariffs at 50% risk crippling competitiveness. Exporters are already exploring relocation to hubs like the UAE and Mexico to preserve market share.
Auto Components: India exports $7 billion worth of parts to the U.S. annually. With costs doubling under tariffs, firms anticipate order cuts, revenue loss, and job disruptions.
Seafood: Valued at Rs 60,000 crore a year, India’s seafood exports to the U.S. may shrink by Rs 24,000 crore as buyers pivot to Ecuador, Indonesia, and Vietnam.
Textiles & Apparel: A traditional labour-heavy sector, now battling tariffs on finished goods as well as a domestic 11% duty on raw cotton imports. The industry warns of job losses and delayed capex if relief isn’t forthcoming.
Agriculture & Leather: Facing immediate demand-side shocks in the U.S. market, further squeezing already thin margins.
Pharma: So far spared by a U.S. national security review, but remains vulnerable to retaliatory duties if tensions escalate further.

Sugandha Sachdeva, Founder-SS WealthStreet, warns the tariffs could shave off 70–100 basis points (0.7–1.0%) from India’s GDP growth this year. For an economy growing at ~7%, this is a material hit.

Read More - Trump's 50% Tariff Penalty Kicks In On Indian Goods, From Aug 27

India’s Response: GST 2.0 as Shock Absorber
On Independence Day, Prime Minister Narendra Modi unveiled GST 2.0—framed as the most significant tax reform since GST’s launch in 2017. The proposal, to be finalised at the September 3–4 GST Council meeting and rolled out by Navratri (September 22), seeks to:
Simplify the structure to two slabs: 5% and 18%.
Create a 40% slab for ultra-luxury and sin goods.
Retain 0.1–0.5% concessional rates for labour-intensive sectors like textiles to preserve jobs.

This timing is deliberate. The rollout is just ahead of the festive season. Navratri through Diwali, ensures maximum pass-through of lower taxes into prices, fuelling consumption when households spend most.

Domestic Cushion Against External Pain
CA Gaurav Makhijani, Associate Partner and Head of Tax (North India & Gujarat), Rödl & Partner India, explains the government’s playbook: “It is no secret that India has a strong domestic market. Earlier this year, the government made significant changes to the income tax structure, exempting income up to Rs 12 lakh. The goal was to increase household disposable income and boost consumption. Building on this, the announcement of GST 2.0 aims to further stimulate domestic demand by simplifying compliance, improving input tax credit flows, and lowering indirect taxes on consumption-heavy sectors.”

According to him, this isn’t just reform, it is strategy. By cutting prices in autos, FMCG, and textiles, GST 2.0 unlocks an estimated Rs 2–2.5 lakh crore (~$25–30 billion) in additional consumption. That number matters because the tariff drag is pegged at $10–15 billion. In other words, GST 2.0 could more than offset the immediate export hit, if consumption responds quickly.

Makhijani adds: “While GST 2.0 is a major economic reform… its timing and messaging also have a strategic dimension. By signaling a focus on domestic demand, India is cushioning itself against external pressures like the U.S. tariffs. This aligns with a broader narrative of economic self-reliance and reassures investors that the government has tools to manage external shocks.”

India’s $500 Billion Trade Ambition Under Strain
But the tariffs don’t just dent short-term numbers; they cloud India’s long-term export ambition.
 

As Sachdeva puts it starkly: “India’s long-term ambition of scaling trade with the U.S. to the $500 billion mark is now under strain, with the tariff conflict threatening to derail progress. The U.S., already India’s largest export destination, has slapped 50% tariffs on a wide basket of goods, doubling the earlier 25% levy in what Washington frames as retaliation for New Delhi’s continued Russian crude imports. India has strongly rejected the move, calling it ‘unjust and unreasonable,’ while pointing out that its energy purchases adhere to global price cap norms.”

Her concern is employment. The very sectors hit, gems, textiles, auto parts, are labour-intensive MSME ecosystems, employing millions. Higher tariffs could force plant closures, layoffs, and delayed investments.

Yet Sachdeva also sees GST 2.0 as the cushion:
A Rs 1.98 lakh crore consumption boost from rationalised GST slabs.
Combined with earlier tax tweaks, Rs 5.31 lakh crore in added consumer spending (~1.6% of GDP).
Rs 52,000 crore in extra GST revenues by FY26, enough to cover tariff-linked revenue erosion.

In her words, “GST 2.0 is not just tax reform—it is a shield against tariff wars and a step towards long-term self-reliance.”

The Numbers Game: GST vs Tariffs

Pankaj Jain, Tax Partner at EY India, lays out the arithmetic bluntly: “GST 2 proposes a shift to a simpler two-slab system (5% & 18%) and an additional 40% sin rate, with many items from the 12%/28% brackets moving down. SBI Research estimates a Rs 1.98 lakh crore (~$24 bn) consumption boost, with revenue foregone at about ₹85,000 crore. Despite the expected revenue shortfall, the reforms are projected to drive a 0.6% rise in GDP, supported by higher consumption.”

In effect, the demand lift (~$24 billion) nearly matches the tariff drag ($10–15 billion). If companies pass on tax cuts through price reductions, especially before the festive season, the offset could be substantial.

Jain concludes: “GST 2.0 is undeniably a long-overdue structural reform, simplifying slabs and fixing inverted taxes. Yet, its timing amid the tariff shock positions it as a strategic countermove, redirecting economic growth toward domestic consumption as export headwinds intensify.”

Risks Still Remain
While optimism is justified, challenges remain:
Revenue gap: Government may lose ~Rs 85,000 crore in GST revenues short term before compliance and growth expand the base.
Pass-through risk: If firms don’t cut prices, households may not feel the benefit quickly enough.
Global volatility: If the U.S. escalates further or expands tariffs to IT services, India could face bigger blows.

A Shield, Not Just a Reform
The US tariff hike landing today is no small event; it jeopardises tens of billions of dollars in exports, thousands of jobs, and a key trade relationship. But India isn’t walking into this trade war unarmed.

By simplifying taxes, cutting rates on essentials, and fueling consumption, GST 2.0 provides a domestic shield against external shocks. As Makhijani stresses, it cushions demand; as Sachdeva notes, it preserves India’s long-term ambitions; and as Jain points out, it offsets the tariff drag in hard numbers.

Together, their views make clear: GST 2.0 is both an economic masterstroke and a geopolitical countermove.