GST on services, not goods, will determine inflation

Once Goods and Services Tax (GST), India’s biggest tax reform since is implemented, country’s inflation will not depend on the ‘goods’, but on the ‘services’ part.

Also read: No surprises in GST rates, promises Jaitley

As far as goods are concerned, 81% of them will be taxed at 18% or less, and goods of mass consumption will attract lower rates of GST.

However, when it comes to services, tax on services would determine the impact on inflation in the country.

GST rates on various goods and services would be decided by the GST council on Friday. However, since GST doesn't include indirect taxes, it won't impact wholesale price inflation.

"With the current set of tax rates, the government has tried to tackle inflation to a large extent and it looks like inflation on goods will not be there," CARE Ratings chief economist Madan Sabnavis told ET.

Also read: Mobile phones to get costlier, thanks to GST

Kotak Mahindra Bank senior economist Upasna Bhardwaj seems to agree to his statements. "Largely, the tax on goods in CPI (consumer price index) basket is on the lower side such as cereals. This will not have a significant inflationary impact but services would determine the overall impact on inflation," she said.

The GST Council includes four rates, of 5%, 12%, 18% and 28% to be applied on different goods and services in the industry.

Given India’s lower food prices, the retail inflation has eased in April to 2.99% from 3.89% in March 2017 and 5.47% in 2016, forming the lowest in the series that began two years ago.

"The conundrum is that controlled inflation will lead to higher consumption. Moreover, there could be revenue slippages because states will collect excise duty. It might be difficult to sustain the growth of revenue if this rate is not revenue neutral," Sabnavis said.

Globally, countries that have implemented GST, like Canada, Australia, and New Zealand, saw a one-time increase in inflation post implementation, but it normalized in a year.

"Services, which is more than half of gross value added, will decide which way inflation will move," said DK Pant, chief economist at India Ratings, a Fitch Group company. "It is expected that services like health, education, telecom and electricity could see higher tax. The overall inflationary impact will also depend on goods which are outside the GST."