GST rate and inflation: Brokerages weigh in on how it will impact you

Experts foresee only a 15 ? 25 basis points increase in inflation

As various aspects of indirect taxes are being brought under one umbrella, the common fear for most people was the possible inflationary impact of the goods and services tax (GST). But, with the finance ministry announcing a four-tier tax structure for GST, most experts prefer to wait for clarity specifically with regard to classification of items under GST to get a true picture on how inflationary the proposed GST could be for consumers.

However, going by information currently available, experts believe that GST’s impact on inflation may not be too severe. This is mainly because a major chunk of goods comprising the consumer price index (CPI) basket are kept off from the taxation purview.

Domestic brokerage Emkay Global is of the view as this being more or less similar to the current duty structure, there could be no positive impulse for inflation.

Experts at Antique Stock Broking also have a similar view and in fact are of the view that zero-taxes on the final product will help in reducing the incidence of effective tax. The point is explained by taking the example of cereals, which under the current structure does not suffer any tax incidence, but the effective tax rate is higher as there is incomplete passage of credits. This will be eliminated by GST.

However, analysts at Motilal Oswal Securities believe that with 50 per cent goods in the CPI basket eliminated from the tax bracket, the implementation of this multiple tax rates structure may lead to continued litigation issues over classification.

Even for goods such as food products other than essentials, readymade garments and cars, which currently fall in the 12 ? 38 per cent blended duty structure (excise duty plus state value added tax), GST may not significantly alter the structure as tax incidence under GST is likely to be the same as the currently prevailing structure. These goods would fall in the 12 ? 28 per cent GST rate.

However, inflationary pressures may become pronounced in case of any service tax levy. Current service tax rate is at 15 per cent and companies had the option of abatement of taxes in case of services such as transport, airline and restaurants. Services forms for nearly 28 per cent of the CPI and hence any substantial alteration in duty structure could trigger inflationary pressures.

“Both 12 per cent and 18 per cent GST rates for services are on the higher side; the silver lining is in the credit set?off that would become available”, say experts at Phillip Capital. Those at Kotak Institutional Research say, "We estimate 15-25 basis points impact on inflation from higher tax rates on 15 ? 20 per cent of the CPI basket, which pertain to services."