Impact of India’s New GST Policy on Nepal

India’s new Goods and Services Tax (GST) regime lowers the price rate of essential consumer goods. The move is expected to strengthen the Indian economy. With lower tax burden, Indian consumers will enjoy greater spending power. This will drive demand and ease inflation, supporting faster economic growth. The tax revision is being seen as a long-term strategic policy for India.
But concerns are rising in Nepal. The open 1,800 km border means India’s new GST policy will have direct spillover effects in Nepal. Cheaper Indian goods, combined with Nepal’s higher taxes and production costs, threaten to undermine domestic industries. This imbalance will disrupt the supply-demand dynamic and put further pressure on the Nepali economy.

India’s Finance Ministry and the GST Council have revised the tax slabs. The old rates of 5%, 12%, 18% and 28% have been replaced with 0%, 5%, 18% and 40%. Essential goods will now fall under the 0–5% bracket. Items previously taxed at 28% will drop to 18%. Similarly, luxury goods, such as high-end cars, select luxury items and tobacco products, will face 40%. The new GST regime came into effect on September 22.

Impact on Nepali Economy

The consequences for Nepal could be serious. Because of the open border, Nepali consumers already favor Indian products. These were cheaper than locally produced goods even without tax changes. With GST reductions, Indian goods will become even more affordable. This will further displace Nepali products, raising imports, hurting local industries and ultimately weakening the economy.

This tax revision poses a serious challenge to Nepali industrialists and entrepreneurs. Consumers living near the border already purchase most of their daily necessities from Indian markets. Large-scale smuggling of Indian goods is also widespread, with Indian goods openly sold in towns across Nepal. As prices fall further, both legal imports and illegal inflows are expected to rise. This will deal a direct blow to domestic industries.

The tax gap is stark. In India, essential consumer goods and pharmaceuticals will now fall under the 0–5% GST slab. In Nepal, the same products are subject to 13% value added tax (VAT) plus excise and other duties. This will make Nepali products far less competitive as consumers will naturally shift to cheaper Indian goods, deepening the pressure on domestic industries and the wider economy.

Need for Counter-tax Policies

The government must adopt counter-tax measures to keep local goods competitive. Strong monitoring and strict enforcement of penalties are essential to curb illegal smuggling. Likewise, cross-border shopping in Indian markets requires tighter regulation.

If Nepal had a closed border like Bangladesh, Pakistan or Bhutan, its independent tax system would not face such severe consequences. But with an open border shared with India, Nepal remains highly vulnerable.

Adverse Impacts on Investment, Jobs

India’s new GST slabs are likely to discourage investment in Nepal and weaken its economy over time. Job opportunities within the country may shrink further, deepening aggravating the existing labor shortage.

A comparison of Nepali products highlights the cost disparity. Products such as noodles, biscuits, snacks, confectionery, juices, soaps, detergents and other home-care goods are taxed at only 0-5% under India’s GST. In Nepal, the same products face 13% VAT as well as excise duties — 5% on soap, Rs 20 per kg on noodles/snacks, Rs 13 per liter on juice.

On top of that, higher labor costs, customs duties on raw materials and other overheads push up production costs in Nepal, making it nearly impossible for domestic goods to compete with Indian imports.

India Supporting Low- and Middle-Income Consumers

India has chosen to heavily tax luxury goods at 40% while reducing taxes on essentials to 0–5%. This directs greater benefits to low- and middle-income groups. It also reflects a strategic, long-term strategy to stimulate economic growth. Nepal, too, must consider similar forward-looking policies to protect and strengthen its economy.

India’s advantage goes beyond tax policy. Producers there enjoy a vast domestic market and export incentives which give them economies of scale that Nepali producers lack. Labor costs in India are lower, with a larger and more flexible workforce. Support from both central and state governments—through tax holidays, subsidies, transport incentives, and special economic zones—further boosts India’s industrial competitiveness.

Need for Policy Review

With a 13% VAT, excise duties, customs on raw materials and an open border, Nepal is at a significant disadvantage. Even before India’s new GST regime kicked in, Indian products were entering Nepal in large volumes. The new policy will only make this worse unless the government acts quickly.

Urgent reforms are needed to address the situation. Former Finance Minister Bishnu Prasad Paudel had once proposed a multiple VAT system. But it did not materialize. Such reforms, combined with the digitization of tax collection, are now essential. Nepal must revise its tax structure, strengthen border management and strictly regulate illegal imports. If necessary action is not taken on time, India’s GST policy could seriously undermine Nepali economy.