GST unlikely to push up inflation

Lower rates lead to concerns over shortfall in government revenue, say economists

On Friday, the goods and service tax (GST) Council finalised the tax rates to be levied on services under the new indirect tax regime. This comes after the council had finalised the tax rates for 1,200 goods the day before.
 
A preliminary reading of these rates suggests initial concerns that GST would push up inflation in the short term may have been misplaced. But, economists worry that lower tax rates under GST may dampen government revenues.
 
A look at the existing basket of the Consumer Price Index (CPI) shows that food and beverages together account for 45.86 per cent of the index. But, most of the items in this category are either exempted or are taxed at very low rates. This holds true for most other items in the index. Items such as health and education continue to be exempted.
 
In fact, as of now, only 15 per cent of the items are taxed at normal rates. And among those, while taxes on telecom, entertainment and consumer durables have now been raised, those on transport and fast moving consumer goods (FMCG) have either been lowered or maintained near earlier levels. This implies that at the aggregate level, the impact on inflation is likely to be limited.
 
“With the effective tax rate intended to be brought down on most items, as well as a large portion of the CPI basket being kept in the exempted category, there is likely to be a limited impact of the GST on goods inflation,” said Aditi Nayar, principal economist, ICRA.
 
“Although the standard rate for services has been kept at 18 per cent, availability of input tax credit going forward, may soften the impact of GST on services inflation,” she said. 
 
Others concur. “On goods, the rates appear to be lower than earlier. If we take the thumb rule that goods are currently taxed at 24 per cent (combining Centre and states), then the rates (under GST) are largely lower than this. In services, a lot of services have been kept at the lower tax level of 12 per cent. So it doesn’t seem to be a major issue,” said Madan Sabnavis, chief economist at CARE.
 

But lower tax rates have raised concerns over whether they will lead to a shortfall in government revenues.
 
“The structure of rates that has been revealed appears to cushion any inflation risk, while posing some concern regarding the revenue buoyancy for the central government, given that state governments revenues' would be protected through the compensation mechanism,” Nayar said.  
 
“If the government is banking on buoyancy, then I don’t think it will materialise as we may not see a pick-up in consumption due to lower taxes,” Sabnavis said.
 
In its Union Budget 2017-18, the Centre had budgeted for only a five per cent increase in collections from Union excise duties in FY17, as against a growth of 22 per cent the year before.
 
On service tax collections, it had budgeted for 11 per cent growth, only marginally higher than the seven per cent in the previous year.