India’s latest revision to its goods and services tax (GST), widely described as GST 2.0, came into effect on Monday and is already being viewed as a double-edged sword for Nepal.

While Nepali consumers stand to benefit from cheaper imports of food, consumer electronic goods, and automobiles, domestic industries warn that the new tax structure could hurt local production and employment.

The Indian government first introduced GST in 2017 to eliminate the cascading effect of multiple taxes and create a common national market.

With the latest revision, most goods and services are taxed at either 5 percent or 18 percent, while ultra-luxury items attract a 40 percent levy.

Under the new reforms, daily essentials, food items, life and health insurance policies, automobiles, electronics, appliances, stationery, beauty and lifestyle services, and machinery are expected to become cheaper in India. This benefit will likely extend to Nepal due to the open border and heavy trade links.

Indian media reports indicate that the revised GST has triggered widespread price cuts across leading food and beverage companies. Daily essentials and pleasure foods (ice cream, chocolates, etc) have become more affordable, with several fast-moving consumer goods (FMCG) brands updating their price lists via distributors, websites, and newspaper advertisements.

Products like Maggi noodles, Nescafé coffee, Amul dairy items, Ferrero Nutella, chocolates, and other processed foods have already seen price reductions.

Consumer electronic goods, including televisions from brands like Sony, LG, and Panasonic, have also followed suit, leveraging the GST revisions to offer discounts ahead of the festive season.

Automakers are also passing the benefits on to consumers as well.

Entry-level hatchbacks have seen reductions of around INR40,000, while premium luxury SUVs have received cuts up to INR3 million, marking one of the most significant price revisions in India’s automobile sector in recent years.

Despite these benefits for Nepali consumers, trade experts warn that India’s GST 2.0 could exacerbate smuggling and the informal imports into Nepal.

Rabi Shankar Sainju, former commerce secretary and trade expert, said, “Illegal imports from India to Nepal have increased significantly in recent years. With India’s latest GST, such activities are expected to double. The price of most goods has already fallen, making informal cross-border trade more attractive.”

Nepal has struggled to regulate informal trade with India, which insiders estimate has reached more than 50 percent of overall trade.

Terminal operators at southern border points report goods arriving in trucks without proper documentation, a practice that has become increasingly common. Experts attribute this partly to the proliferation of small customs posts along the southern border, which has inadvertently encouraged illegal trade.

Most of the goods entering Nepal informally are daily consumables, including processed and unprocessed food items, readymade garments, and consumer electronics such as refrigerators and washing machines.

The influx of cheaper Indian goods makes it difficult for Nepali producers to compete, given higher production costs domestically.

Sainju said this trend threatens not only local industries but also employment and government revenue.

India remains Nepal’s largest trading partner, yet the trade deficit continues to widen. In the last fiscal year, Nepal recorded a trade deficit of Rs846.54 billion, with exports to India at Rs224.68 billion while imports reached Rs1.07 trillion.

Sainju warned, “Nepal’s trade-based economy could face its worst situation if the government does not control informal imports from India following the new GST reforms.”

To curb informal trade, experts recommend bolstering security forces at the southern border and holding customs officials accountable for monitoring goods.

The engagement of officials with wholesalers and political networks has allowed informal trade to flourish, and unchecked inflows of cheaper goods threaten the survival of domestic industries.

Past examples include the availability of banned luxury items in Nepal despite government restrictions.

Indian officials, however, emphasize the positive aspects of GST 2.0.

In an article published in The Rising Nepal on September 17, Indian Ambassador to Nepal Naveen Srivastava argued that the reforms benefit middle-class families through lower prices, promote competitiveness among micro, small, and medium enterprises (MSMEs), create export linkages, and improve the overall investment climate.

“It builds on India’s strong economic momentum and creates an environment to attract global investment,” Srivastava wrote.

“Given strong economic connectivity between India and Nepal, our friends here also stand to benefit from this growth story. I hope Nepal’s youth, including Gen Z startups, will foster new business relationships between Nepal and India. We remain committed to facilitating this process.”

He encouraged Nepali companies to view India as a growth frontier.

For Nepali service sector companies already present in India, such as Baral Logistics, cheaper input costs on commercial vehicles, small diesel engines, and construction materials could reduce expenses.

Similarly, lower prices for consumer goods could boost sales of Nepali products like Goldstar shoes. Reduced taxes on hotel accommodation and restaurant inputs would benefit business travellers, tourists, and chains such as Wow Momo.

“Most of all, the new changes should inspire confidence in Nepali startups to explore India as their first market outside Nepal,” the ambassador said.

Despite these potential benefits, Nepali businesses remain cautious.

Reciprocity under the India Trade and Transit Treaty has long been a subject of negotiation, but cheaper imports under GST 2.0 threaten local competitiveness.

Narendra Kumar Khadka, chairperson of the Cottage and Small Industry Committee at the Federation of Nepalese Chambers of Commerce and Industry, said, “If our government does not adjust VAT and customs duties in line with India’s revised GST, illegal trade will rise significantly. Cottage and small-scale industries will struggle to compete with Indian goods.”

Khadka highlighted that small industries, already operating at half capacity and grappling with post-pandemic challenges, face difficulties in production, loan repayment, and market expansion.

The latest GST reforms threaten to further undercut these sectors, including domestic producers of packaged foods, grains, and ready-made garments, he said.

He stressed that proper tax adjustments are essential to prevent the growth of illegal imports and protect local industry.