GST to add 40 bps to growth rate; no adverse impact on inflation: HSBC

The GST rollout will add 40 bps to GDP, lower than earlier estimates as multiple tax rates and exemptions announced under it are far from an 'ideal' structure and could blunt the growth impact of the reform process, says an HSBC report.

It also said that the Goods and Services Tax will not have an upward impact on inflation.

The government finalised a multiple rate tax structure, while an ideal GST would have carried one single rate with very few exemptions, HSBC said.

Moreover, a big list of excluded items will result in incomplete input tax offsets, resulting in continued 'tax cascading' which an ideal GST (with minimal exemptions) would have eliminated, it added.

According to the global financial services major, the medium term addition to GDP growth from this reform will be closer to 40 bps, "sizeable, but lower than the 80 bps" HSBC had calculated earlier.

HSBC further said that if the government is able to move towards a lower number of rates and fewer exemptions over time, the GST will ultimately carry a "greater punch".

Almost all goods and services have been classified into groups attracting GST rates of 5 per cent, 12 per cent, 18 per cent and 28 per cent respectively.

In addition, four items (namely luxury cars, aerated drinks, tobacco and related 'paan' products) will attract separate cesses each.

The report noted that there is likely to be no upward impact on inflation, rather if tax cuts are passed on and the input tax credit mechanism runs with part efficiency, the GST could help lower the inflation rate by 10-50 bps.

"Over the medium term, if exemptions are kept at a minimum, by streamlining production, enhancing delivery chains and overall investment, GST could bring down inflation more permanently," HSBC said, adding that the new GST regime is expected to make the Reserve Bank of India more relaxed about lingering inflation fears.