GST impact on inflation – Real impact on common man

Introduction

Globally, it has been observed that GST had a long-term impact on the economy despite having some short term outrages. In India, what we have is a compromised GST (or Indian GST we can say) and not the ideal GST. However, it is better to have muddy roads than to have no roads at all.

As said, Indian GST is not the ideal one, but it is being modified to suit the needs of the nation. For example, a single rate under GST is ideal; however, it will have a direct impact on inflation which would hurt the common man directly. Hence, in order to safeguard the common man, it was proposed to have multiple tax structure which is not an ideal one, but currently in the nation’s interest.

Inflation – Meaning

When the same amount of currency buys fewer goods and services or when there is a fall in the value of purchasing power of the currency, then that situation is termed as Inflation. In India, inflation is measured by changes in Wholesale Price Index (WPI) or Consumer Price Index (CPI).

• Wholesale Price Index (WPI): Wholesale Price Index (WPI) was widely used as an inflation indicator in India. However, now India has adopted Consumer Price Index (CPI). Wholesale Price Index is used to measure the price change at the whole sale level of certain important goods.

• Consumer Price Index (CPI): It is used to measure the prices volatility of consumer goods and services at the retail level. In other words, it captures the price impact at the consumer level, i.e. a price at which an ordinary citizen would buy the product.

Impact of GST on Consumer Price Index (CPI)

As per the proposed tax structure, it is estimated that there would be the positive impact on goods of basic necessity as there would be little or no tax at all. As per the finance minister Arun Jaitley, 50% of the items covered under Consumer Price Index (CPI) shall not be taxed. Further, items of mass consumption will be under 5% bracket. Hence, against all the odds, the coming GST may wipe some tears of the poor in India.

Global Phenomenon

Internationally, many countries saw a short-term spike in the inflation which was settled in a longer run. However, Indian GST is the bit different what the world has implemented and hence, it would not be ideal to compare the Indian situation with the world.

Let us assess the impact of inflation due to the advent of GST.

• Goods of basic necessity: There would be a positive impact of GST on the goods of necessities. The prices of the product will come down. This reason behind is that cascading effect will be nullified; further, there will be no tax on these food items.
   
• Tax on Services: Service industry contributes to GDP by more than 50%. The service sector is the largest sector of India. It is also the second-fastest growing sector in the world just after China. The Gross Value Added (GVA) at current prices of service sector is estimated at 61.18 Lakh crore (around 52.97%) in 2014-15.

Under GST regime, the service sector may get inflated by the additional 3% if services are taxed at 18% which are more likely to be. Currently, services are taxed at 15% (basic rate 14%, 0.5% Swachh Bharat Cess, 0.5% Krishi Kalyan Cess).

The removal of the cascading system will bring in some relief for the service industry. Currently, under CENVAT rules, service providers are not allowed to avail the credit of VAT paid on inputs and capital goods. This ultimately adds up to the total cost of services.Under GST regime, the removal of cascading effect will bring in certain relief to the sector, but the additional burden will have its own impact.

• Luxury items: The rich is getting richer and the poor is getting poor. This is not a phrase but a harsh truth of the real world. In India, it is estimated that richest 1% holds 53% of the wealth in India. Hence, ideal economics would be to tax more the richer to curb this worrying gap.

As per the council meeting and the decision on GST tax rate, the luxury item is set to be taxed at a higher rate of 28% which may further increase by additional cess. This rate is also called a demerit rate under GST. The demerit rate shall also be extended to tobacco products.

Further, let us see what other watch dogs have to say about the GST impact on inflation;

“About 55 percent of the basket of items in the consumer price index (CPI) is exempt from GST. The State and Centre have built a uniform list of items that will be excluded from GST. As most of the items in the CPI basket will not be affected, the impact of GST implementation on inflation becomes marginal.”

RBI Deputy Governor Urjit Patel

“Poor will largely be protected under the GST since 53-54 percent of the CPI basket will be exempt from it, 30-35 percent will be taxed at a lower rate, and only 12-13 percent will be taxed at the normal rate. Thus, there is no obvious reason as to why GST implementation will bring about a spike in inflation.”

Chief Economic Adviser Arvind Subramanian

“Service tax rate is definitely going to go up from the current 15 percent rate. However, as estimated by Subramanian’s panel, at 18 percent RNR, the net impact will be minimal.”

Disposal Saha, Economist at Antique Research

As said, there are all speculations from the industry, economist, watchdogs and the government. However, things will be clear once the GST is implemented and actual impact can be assessed.

Conclusion

Inflation is one of the most important terms for any person especially the common man. Know more about the impact of GST, subscribe to our online monthly magazine.