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GST and Inflation in India

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Posted on
Jun 09, 2020

GST is going to be implemented on 1st July’17 and this has raised a lot of questions in people’s minds. Questions like: “What will become cheaper, what will become more expensive, which industries will get affected the most?” etc. have been looming around everyone’s minds. As we arrive closer to the date things seem to get clearer. Let us take a look at GST and its inflationary impact.

According to CARE Ratings chief economist Madan Sabnavis, there will not be any inflationary impact of GST on goods as the government has tried to tackle inflationary pressures to a large extent with the tax rates decided. The overall impact of GST on price rates in India will be less than 20 basis pts. GST shall have a marginally negative impact on growth, which will be fiscally neutral in the near term.

More than 500 services and 1200 goods have been broadly segregated at rates of 5,12,18 and 28%.

According to ET, 81% of the goods are going to be taxed at 18% or less with most of the mass consumption goods being on the lower rates. But the impact on retail inflation can only be determined after tax on services is decided by the government. Wholesale price inflation will not be affected because it does not include indirect taxes. GST shall remove the cascading taxes which will boost productivity, it will lower the costs, aid in the formalization of the economy and create large revenue benefits for the Government. This shall lead to a drop in inflation by 2% as per the revenue secretary Hasmukh Adhia. (Source: TOI)

Other countries that had implemented GST had witnessed a one-time inflationary pressure. These countries include Australia, New Zealand, and Canada. However, over the year’s course, these pressures eased out.

Although according to sources health, education, telecom, and electricity might attract higher taxes after GST. Overall Inflationary pressures after GST can only be determined after considering the tax on services and the goods that are not in the ambit of GST.

HERE ARE 5 THINGS THE ECONOMY SHOULD WATCH OUT FOR AFTER GST IS IMPLEMENTED:

Corporate operations will have to be restructured
With various rules for compliance, bigger companies will be at an advantage as they have a supply chain in order and can offset taxes paid on inputs. However, for smaller companies cost of compliance may be expensive. They might struggle a bit in the beginning phase keeping up with these regulations. But eventually, implementation of GST should result in cost savings in the supply chain network and expedite a shift from unorganized to organized trade (According to foreign brokerage firm Jefferies).

The benefit of lower tax to be passed on to end consumer
There are doubts whether the ultimate benefit of the tax reduction will be passed on to the consumers or the businesses will assume the benefits of lower taxes for themselves in order to gain profits. Even though the GST Council, headed by finance minister Arun Jaitley, aims at keeping a close vigil on whether companies are passing on the benefit of lower taxes to consumers, experts expressed doubt on the implementation of the anti-profiteering norm. “We believe that while corporates would pass on the direct benefits of GST (like a lower tax rate), they would aim to retain partly (if not fully) the indirect benefits from the saving in logistics costs, streamlining of business processes and the seamless flow of input credits,” Nomura said in a report.

Lower inflationary pressures
As explained above the inflationary pressures on consumer goods will be low due to the majority of the mass consumption goods being taxed at a lower rate. However, there are doubts that the increasing cost of compliances to companies will lead them to pass on this cost of compliance to consumers, thus increasing the prices at a later stage.

No cutting of rates in June by RBI
“RBI will watch out for the monsoon progress as also how the GST pans out,” said Sinha of India Ratings. In the last policy review, RBI had flagged concerns that the “one-off” impact GST may be inflationary. SBI’s Ghosh says the RBI will most probably pause on June policy review. Due to ease in inflation after GST RBI might not immediately ease out interest rates.

Slower economic growth
The beginning phase after GST is implemented might see slower economic growth due to compliance efforts by companies. Moreover, companies will take time to restructure their business. But over the long run, it will attract foreign investments and India will see positive impacts of GST.

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