4-Tier GST structure’s impact on Inflation

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GST is a new taxing policy; its implementation has brought a lot of anxiety and tension for the common people, small businessman and big entrepreneurs. It is considered as a huge change in Indian Economical and Tax structure which influences many sectors. In spite of all the uncertainties and challenges, there is confidence that in the long-term it will lead to benefits in the form of higher GDP growth and wider tax base. After many amendments in its rules and policies finally we got the 4- tier GST structure, but will it bring a hope to people and businessman? Does it affect inflation rate of the country?  For this First we have to understand what 4 –tier structure is, the GST Council has drawn up a 5%, 12%, 18% and 28% categories for the new indirect tax system.

  • The regular used food items and grocery is included in 5% and 12% and about 50% of items are included in 18% tax, luxury and items like tobacco are kept in 28% (highest tax).
  • Previously, for most of the items taxes were cumulated to 25% due to tax cascading effect (including taxes like CST, entry tax, octroi and several cess were added), but in 4 – tier GST this cascading effect is removed and hence helped in reducing prices of commodities.
  • The government has introduced an anti-profiteering law under the GST bill to ensure that the benefit due to a reduction in the rate of tax or from input tax credit is passed on to the consumers.
  • Service sector which contributes to around 50% of the total national GDP, the inflation strikes here as tax increases from 15% to 18%. This will increases pressure on prices in the services sector. Service providers will get input tax credit for goods as well as services purchased by them, which will to some extent help in reducing service cost.
  • However, in many of the service providers like banking, insurance, telecom the compliance cost is going to increase under the GST.
  • Health sector continues to be exempted under GST.  It is also to be noted that primary and secondary education is exempted but higher private education is not exempted from GST.
  • Another aspect to be taken into account is that many items are not yet covered by the GST like alcohol, crude oil, natural gas, aviation fuel, diesel, petrol, electricity and real estate are currently out of GST, and states will levy their own taxes on these and adds value to final product, finally increases threats of inflation.

International experience shows varied impact in different countries. In Australia, Canada, Japan, China and Singapore, there was an increase in inflation after GST implementation. However, other countries like New Zealand, Greece, Portugal, Thailand, and Vietnam inflation reduces with the implementation of GST.

In case of India it is expected that in short term it may be not easy to reduce prices of commodity. However, in the short-term overall GST impact on inflation could be between neutral to a minimal increase. In the medium to long-term, GST should put downward pressure on inflation through efficiency gains, lower transportation cost and decrease in supply chain stringencies.

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