Impact of GST on Inflation

GST was introduced in India to waive off indirect taxes on all goods and services and introduce a single direct taxation system, which will lower the prices of essential goods and services. But it seems like it didn’t happen, as of now in 2022, it’s more than 5 years after the launch of GST in India. Within 1 year of the launch of the GST, the CPI inflation increased from 3.66% to 4.24%. However many economists believe that an increase in the CPI in the initial phase was obvious and it aimed to maintain inflation rates for the long term.

Impact of GST on Inflation

How do GST Rates Drive Inflation?

The inflation rates of any nation can be simply measured with the Consumer Price Index Inflation (CPI). The CPI simply measures the change in the price of a specific category of goods and services over a specific period. The prices of any goods and services go up and down with the change in taxation rates, raw material prices, and production efficiency, etc. In India GST rates stand out as one of the major factors affecting the price of goods and services.

• The government of India has different GST rates for different kinds of Goods and Services. And these GST rates are applied to specific goods and services keeping in mind their demand and supply.
• The government tends to keep nominal GST rates on basic goods like groceries, stationary, and food items, while keeping high GST rates on luxury items such as liquor, Cigarettes, etc.
• The GST rates on any goods or services are not fixed and they can be varied by the government considering their demand and availability. 
• Along with the Repo rate and reverse repo rate, the GOI also uses GST rates to control the inflation rate in India. 

According to an RBI report, more than 50% of goods and services with GST applicable are not considered under the CPI basket.

Does GST Affect the Prices of Goods and Services?

Theoretically, GST doesn’t have much effect on the inflation rates, however, it may result in the increase or decrease of prices of certain goods and services. The government calculates the revenue-neutral rate (RNR) before implementing the GST rates on any goods or services. However, RNR is a calculative method and may lead to an up and down in the price of goods. The effect of GST on the prices of goods and services depends more on the structure and design of the tax. Thus it can be said that the change in GST rates does not have a considerable impact on the up and down in the prices of goods and services. 

GST’s Impact on Inflation in India:

• The inflationary impact of GST can be assessed by looking into the overall CPI (Consumer Price Index)
• In the estimation, the CPI was expected to be around 3.24%, but in actuality, it is 4.61%. This simply indicates that the CPI moved up by 1.37%.
• In case GST would have not been applied the expected CPI would have been around 3.24%.
• The CPI core inflation is not considered in the above assessment which applies to essential goods and services like food items and fuel.
• However, GST has proved to be quite beneficial in the case of the tobacco industry, as it generated great revenue from this industry with the highest GST rates.

Is there a Need for Revision in the GST Rates?

The Central Government of India keeps on revising the GST rates in specific periods. But still, there are many goods and services on which there is a need for revision in GST rates.

• Processed foods and beverages attract around 12 to 18% of GST, which includes milk packets as well as some essential processed food items. There is great demand as well as a need for processed food and beverages in India and thus there is a need for revisions in GST rates.
• The GST on luxury items such as Cigarettes and liquors can be further increased. Also on the luxury clothing and accessories. 
• The GST rates of LED lamps and solar water heaters are also around 18%, which can be reduced as these items need to be promoted to shift towards a greener environment.