GST rationalisation impact on inflation depends on the effect on CPI components: Bank of Baroda Economist
He also said the impact on investment will be driven by the final effect on consumption. If consumption increases, it can spur more investment in specific products.
The Indian government has announced the idea of having two major GST slabs viz., 5% (merit) and 18% (standard).
'The highest slab of 28% would be abolished and all goods and services in this bracket moved to the 18% rate. 99% of goods in the 12% rate will move to 5%. The balance 1% would go to 18%. The existing 40% rate would hold for tobacco and other sin goods. The exempted and special rates of 0.25% and 3% rate goods would remain unchanged,' Madan Sabnavis, Chief Economist said.
'The impact on inflation would depend on how various components of the CPI index are impacted by the new rates. While it has been projected as lowering the tax burden there can be a tendency for inflation to come down. But the extent will depend on the individual tax rates,' Sabnavis said.
However, at the micro level, any reduction in GST as it is expected for goods like hair oil, toothbrush, pencils and others may not exactly increase consumption but will release resources of households that can be spent on other products and services.
'Impact on investment will be driven by the final effect on consumption. If consumption increases, it can spur more investment in specific products,' Sabnavis remarked.
Having fewer slabs certainly makes the system simpler and leads to better compliance and removal of ambiguity. But it needs to be seen whether or not the final effect is tax neutral. If movement of goods across slabs provides a net gain on the fiscal side, then it would not change much from the consumption point of view, he said.
'On the whole it has been projected to provide support to consumption which is positive for the consumer goods segments. The ultimate impact has to be gauged from the point of view of fiscal impact given that any restructuring has to be a zero-sum game – if the consumer is to gain, there has to be some let off on the budget. This however, can get corrected once the economy grows at a faster rate in the coming years,' Sabnavis said.
The GST Council is to meet in Sept-Oct and deliberate on this proposal.
The compensation cess is to be phased out and it is possible that goods and services with 40% slab would take in this effect.
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