The Goods and Services Tax (GST) has undergone a landmark passage in both houses with a majority of the parties coming to a common consensus. The Goods and Services Tax Bill (2016) has received presidential assent to make a constitutional amendment in the Income Tax system. In this post, we will explore how the implementation of the GST bill will impact inflation.
The Current State of Inflation
Currently, the Reserve Bank of India (RBI) and the International Monetary Fund (IMF) has projected India’s growth rate at 7.6% for India in 2016-17. Urjit Patel, the new RBI Deputy Governor continues to keep inflation at regulated levels. Measures are still being taken to cut the 22-month high food inflation of 5.77 per cent, which can also be attributed to the increase in fuel inflation. However, if the GST rate does not exceed 18-20% then there would be no significant impact on businesses and the final consumers. But, with the implementation of the GST, the Consumer Price Index (CPI) trajectory could see an increase of 30-50 basis points on CPI within the first year.
Prices that will rise or fall
However, for consumers and businesses alike, certain products like FMCGs would see a spike in the tax rate as items like vegetables and cereals will be more expensive. Auto and consumer durables and cement firms will benefit immensely from the significant reduction in tax. There will a certain degree of impact to utilities and pharmaceuticals, but the services sector will be impacted largely with high taxes. It is uncertain if other products like alcohol and petroleum will be exempt from GST as tobacco and tobacco related products will also attract a higher tax.
GST will ease the registration and the regulations required in starting a business, eliminating border tax, and most importantly the tax on the manufacturer, traders and the end-consumer. Though the taxes would reduce cumulatively, the uniform tax rate of 18 per cent would be much higher for certain commodities. The hike in 7th Pay Commission for government officials will put pressure on inflation in a similar way to the introduction of the National Food Security Bill did in 2011.
Eleven states would adhere to the GST guidelines and be a part of a single uniform taxation system. This will help reduce the complex political system that has diverse laws on tax and policies that conflict with other states. The base short term macroeconomic implications of GST would have long term benefits and help the government create fiscal policies for the upcoming years. Recently, the RBI suggested that the impact of GST would only have short term effects on inflation with the effects reducing after the first year.
Moody’s, a financial credit agency, has high regard for India’s financial trajectory with the introduction of the GST. The simplification of the indirect tax structure and cesses would enable the creation of a single Indian economic entity regardless of location and size of business.
The implementation of GST at a rate of 18 to 20 per cent by next April will help your small businesses immensely. Your business stands to gain with a reduction in the tax rates, simplification of trade across state borders and the ease of doing business nationally.