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GST rate of 18-20% to cause mild inflation: Economists

NEW DELHI: A standard goods and services tax (GST) rate of 18-20% will not lead to significant inflation but a higher rate can fuel inflationary pressure, say economists about the indirect tax reform.

Standard rate is one that will be levied on most goods, except some essential ones that will be levied at a lower rate and some ‘demerit goods’ to be levied higher late.

“The more you move away from the standard rate of 20%, the inflationary pressures will rise,” said Abheek Barua, chief economist at HDFC Bank. “Inflationary pressures will depend on how the RNR (revenue-neutral rate, or the rate at which tax revenues will remain the same for Centre and states) is split between standard and low rate,” he said.

Madan Sabnavis, chief economist at CARE Ratings, said, “GST will be inflationary but not seriously inflationary.” He said the rating agency does not expect consumer price inflation (CPI) “to go beyond 5.2-5.3% vis-a-vis the 5% expectation”.

Whatever little impact on CPI would be because of the large 30% services component in the index, economists said. Services are currently taxed at 15% and the incidence will rise under GST.

“There will be mid would become expensive,” said DK Joshi, chief economist at ratings agency Crisil. He said the inflationary pressures will reduce in the medium term because of efficiency gains.

City had in a report this week said, “Countries like Canada, Australia, and New Zealand have seen one-time increase in inflation post GST implementation, which normalized in a year.”

Upasna Bhardwaj, senior economist at Kotak Mahindra Bank, said, “Because of the implementation of the GST, we expect an upside risk of 30-50 basis points on CPI trajectory over a course of one year.”

Last year, a committee headed by Chief Economic Adviser Arvind Subramanian had recommended the standard GST rate at 17-18% and RNR was put at 15-15.5%.

“RNR in the 15-15.5% range with a lower rate of 12% and a standard rate of 18% would have no aggregate inflation impact,” the committee had said. “But a higher RNR with a lower rate of 12% and a standard rate of 22% would increase inflation by between 0.3-0.7%,” it added, warning that care needs to be taken to ensure that “GST does not become the target of popular disaffection on the grounds that it fed higher inflation”.

Former finance minister P Chidambaram, during the debate in Rajya Sabha ahead of the voting on GST bill on Wednesday, said, “Let me go on record that it is hugely inflationary and will lead to a backlash if you jack up the service tax rate from the current 14.5% to around 23 or 24%.”

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