Expert view: GST's impact on inflation - 50% prices untouched, 30% lowered, 20% increased

One of the fears about the Goods and Services Tax (GST), globally, is that consumer prices can stay higher for longer because tax increases are passed on faster than tax cuts. Thus, Australia and Malaysia had to take steps to curb inflationary pressures after introducing GST.

GST Council in India has assured that the effective tax on all businesses put together would be lower under GST than now. But the impact on inflation will depend on the extent to which businesses pass on the tax changes to consumers.

When we mapped GST rates with components in the consumer price index (CPI) basket--which closely represents the household consumption pattern--we found that GST rates are broadly lower than, or even on a par with, current rates. Most mass-consumption goods have been taxed at a lower rate, and several essential food commodities have been exempted.

However, for some items such as services to higher education institutes, utility bills, personal care products, sugar, prepared meals, snacks and sweets, pan, tobacco and intoxicants, where current inflation is already high, the tax incidence, too, will be higher under GST. These items have around 20 per cent weightage in the CPI basket and could see a one-time transitory inflation hump.

For a little over half of the CPI basket, the tax incidence remains unchanged. The remaining third of items see lower tax incidence, allowing for price cuts at the discretion of the manufacturer, who may choose not to do so. Although the GST Council has inserted an antiprofiteering clause in the Act to punish companies that fail to pass on the tax benefit to consumers, the rules to identify profiteering cases have not been finalised yet.

Globally, anti-profiteering measures to combat temporary inflation during the tax transition phase work best when implemented well before implementing GST. Australia, for instance, applied an anti-profiteering rule a year in advance.

Consumer price index-based inflation, currently low at 2.2 per cent, is expected to rise after July-Au gust. But that may have more to do with the wearing off of the base effect. We don't expect GST to have a significant impact on inflation and maintain our CPI inflation forecast at 4 per cent for this fiscal.

While short-term hiccups can not be ruled out, the efficiency gains over the long term will en sure that the economy is a net gainer in terms of growth, inflation, ex 2.18 per cent ports and fiscal health.