One of the fears about the Goods and Services Tax (GST), globally, is that consumer prices can stay higher for longer because tax increases are passed on faster than tax cuts.
The impact on inflation will depend on the extent to which businesses pass on the tax changes to consumers. The government may see a revenue loss of around Rs 1 lakh crore and some jump in inflation in the coming year due to goods and services tax (GST), Thomas Isaac, Kerala's finance minister said on Thursday.
The revenue loss could be due to reduction in taxation rates for certain goods under GST compared to earlier. On the other hand, there could be inflation for first five months, said Isaac.
Sanjay Mahendru, commissioner (service tax 1), Mumbai however added that several companies that had managed to escape taxes earlier would now be under GST's net. This would lead to increase in the number of tax payers. “Around 6.5 million people have already registered on GSTN. GST will lead to more transparency, due to minimum interaction between the taxpayer and the tax official,“ said Mahendru.
The implementation of GST is going to effect direct taxes, helping in widening of the tax base and increasing the taxes collections which will help in curbing black money circulation.
GST rates with components in the consumer price index (CPI) basket--which closely represents the household consumption pattern--the GST rates are broadly lower than, or even on a par with, current rates. Most mass-consumption goods have been taxed at a lower rate, and several essential food commodities have been exempted.
However, for some items such as services to higher education institutes, utility bills, personal care products, sugar, prepared meals, snacks and sweets, pan, tobacco and intoxicants, where current inflation is already high, the tax incidence, too, will be higher under GST. These items have around 20 per cent weightage in the CPI basket and could see a one-time transitory inflation hump.
For a little over half of the CPI basket, the tax incidence remains unchanged. The remaining third of items see lower tax incidence, allowing for price cuts at the discretion of the manufacturer, who may choose not to do so. Although the GST Council has inserted an antiprofiteering clause in the Act to punish companies that fail to pass on the tax benefit to consumers, the rules to identify profiteering cases have not been finalised yet.
Globally, anti-profiteering measures to combat temporary inflation during the tax transition phase work best when implemented well before implementing GST.
A standard goods and services tax (GST) rate of 18-20% will not lead to significant inflation but a higher rate can fuel inflationary pressure, say economists about the indirect tax reform.