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MOST OFTHESERVICESKEPT
AT ATAXLEVELOF12%
GST unlikely to push up inflation
Lower rates lead to concerns over shortfall in government revenue, say economists
ISHAN BAKSHI
New Delhi, 19 May
O
n Friday, the goods and service tax
(GST) Council finalised the tax
rates to be levied on services under
the new indirect tax regime. This
comes after the council had finalised the tax
rates for 1,200 goods the day before.
A preliminary reading of these rates sug-
gests initial concerns that GST would push up
inflation in the short term may have been
misplaced. But, economists worry that lower
tax rates under GST may dampen govern-
ment revenues.
A look at the existing basket of the
Consumer Price Index (CPI) shows that food
and beverages together account for 45.86 per
cent of the index. But, most of the items in
this category are either exempted or are taxed
at very low rates. This holds true for most
other items in the index. Items such as health
and education continue to be exempted.
In fact, as of now, only 15 per cent of the
items are taxed at normal rates. And among
those, while taxes on telecom, entertainment
and consumer durables have now been
raised, those on transport and fast moving
consumer goods (FMCG) have either been
BUTTER, HAIR DYES& WATER
COLOURSON LUXURYLIST
CPI BASKET
Pan, tobacco and intoxicants
Clothing and
footwear 6.53
Fuel and
light
6.84
Housing
lowered or maintained near earlier levels.
This implies that at the aggregate level, the
impact on inflation is likely to be limited.
With the effective tax rate intended to be
brought down on most items, as well as a large
portion of the CPI basket being kept in the
exempted category, there is likely to be a lim-
ited impact of the GST on goods inflation,
said Aditi Nayar, principal economist, ICRA.
1% TCSWOULD BECHARGED
BYE-COMMERCEFIRMS
then the rates (under GST) are largely lower
than this. In services, a lot of services have
been kept at the lower tax level of 12 per cent.
2.38 Miscellaneous So it doesnt seem to be a major issue, said
28.32
Madan Sabnavis, chief economist at CARE.
But lower tax rates have raised concerns
over whether they will lead to a shortfall in
government revenues.
Miscellaneous The structure of rates that has been
comprises of
household revealed appears to cushion any
Weights goods and inflation risk, while posing some concern
10.07 services, health,
regarding the revenue buoyancy for the
% transport and
communication, central government, given that state
recreation and
amusement, governments revenues' would be protected
Food and beverages education,
personal care
through the compensation mechanism,
45.86 and effects Nayar said.
Source: MOSPI If the government is banking on buoy-
ancy, then I dont think it will materialise as
we may not see a pick-up in consumption
due to lower taxes, Sabnavis said.
Although the standard rate for services In its Union Budget 2017-18, the Centre
has been kept at 18 per cent, availability of had budgeted for only a five per cent increase
input tax credit going forward, may soften in collections from Union excise duties in
the impact of GST on services inflation, she FY17, as against a growth of 22 per cent the
said. year before.
Others concur. On goods, the rates On service tax collections, it had
appear to be lower than earlier. If we take the budgeted for 11 per cent growth, only mar-
thumb rule that goods are currently taxed at ginally higher than the seven per cent in the
24 per cent (combining Centre and states), previous year.