Multiple rates make GST complex; benefits to be fewer than thought: Nomura

All goods and services have been classified into groups attracting rates of 5, 12, 18 and 28%

Gains from the goods and services tax (GST) in its current form will be "far less than initially envisioned" as the structure is fairly complex with multiple tax rates, says a Nomura report.

The GST as proposed has a multiple rate structure as almost all goods and services have been classified into groups attracting GST rates of 5, 12, 18 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 GST as proposed is fairly complex with multiple tax rates (across different categories and even within the same category) in order to minimise the inflation impact and due to political considerations," Nomura said in a research note.

It added that "this will reduce efficiency gains from having a simplified tax structure. We hope that, in coming years, the government will be able to work its way towards a more ideal GST".

Under the goods category, petroleum products, alcohol, electricity, real estate and several subcomponents of food have been kept outside the GST ambit. Under services, health and education, amongst some other, have been excluded.

"While we are positive, we do believe that, in its current form, the gains from the GST will be far less than initially envisioned," the report noted.

On GST and its impact on inflation, it said that though over the longer term GST is expected to be disinflationary, this trend might not get reflected in the near term.

"Given asymmetric pricing responses and the experience of other countries, we will remain cautious on pricing behaviour until after the GST's implementation," the report said, adding that over the longer term, the GST should be disinflationary owing to reduced logistics costs.

On monetary policy, the report said the Reserve Bank is expected to tread a cautious path.

"... Given much of the ongoing drop in inflation is due to transitory factors and given other factors that will reverse (narrowing output gap, remonetisation, house rent allowance increase), we continue to see the RBI's next move as a hike rather than a cut," it added.