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Inflation pangs for Finmin to continue even after GST rollout

business Updated: Aug 06, 2016 01:32 IST
Timsy Jaipuria
Timsy Jaipuria
Hindustan Times

Revenue secretary Hasmukh Adhia says the services sector needs special attention. (Reuters)

The government has managed to get the unified Goods and Services Tax (GST) past the Rajya Sabha bottleneck, but inflationary pressures and hike in taxes on services will be implementation of a bugbear for the finance ministry.

“Whether or not GST will cause inflationary pressure is itself a moot question,” revenue secretary Hasmukh Adhia told HT. “If the exemption list and rate structure are properly designed, one can avoid inflationary pressures, but we need to watch inflation numbers after GST is implemented.”

The services sector, he said, needs special attention. “It is important to take care of the services sector at the time of finalising the rate structure. We cannot suddenly spike the tax on the services sector.”

The composition of GDP in India is broadly a combination of three big categories — agriculture contributing 16%, industry (31%) and services, the biggest chunk, with 53%. So, a higher rate on services would have an overall inflationary impact.

“The discussion on the rate of GST indicates that it could be 18% or higher, which makes it a clear case of an increase of 3% or more in service tax . This is going to be passed on to the consumer of services, and hence there will be some inflationary pressure. Mitigation of this would depend on the efficiency of the tax administration and enforcement,” said Ranen Banerjee, partner and leader, public finances at consultancy firm PwC.

An 18% GST rate can potentially push up phone and electricity bills immediately after rollout: these services are currently taxed at 15%. Most services, including telephone bills, air travel, credit card bills and hotel bills are likely to rise.

The exemption list is likely to include essential services, such as healthcare and education.

Experts cite precedents: for the first few years after Australia implemented a uniform GST, inflation had spiked. So for the government, inflation will be an important barometer.

But, hopeful of not much of an impact, chief economic adviser Arvind Subramanian said even if the GST rate is 18% to 20%, there might not be an impact on the average inflation.

Similar sentiment was expressed by Moody’s Investors Service, which said that GST will have no major impact on inflation if the tax rates are within the revenue neutral band.

However, there is likely to be some breather with the overall tax on most commodities coming down. On most goods, the overall tax incidence will be lower if the rate is 18%, though initial inefficiencies in pass-through and set-offs could lead to some increase in retail prices, Banerjee said.

According to estimates of the 13th Finance Commission, prices of agricultural goods will increase by 0.61 % to 1.18%, while prices of manufactured items would fall by 1.22% to 2.53 %.