Inflation and GST correlation - 2022 Update
Theoretically, GST doesn’t have much effect on the inflation rates, however, it may result in the increase or decrease of prices of specific goods and services.
Inflation broadly depends on 3 factors, Demand Pull or Increase in Demand, Built-In Future Expectations & Cost-Push effect or Increase In Cost. Whereas GST is a major part of indirect tax which is part of govt income it does not directly impact inflation but indirectly it will affect the prices of goods and services depending on the structure and design of the tax rates on inputs (raw material and resources) and outputs (consumed goods).
Inflation Trend in India in 2022
The country’s retail inflation, which is measured by the Consumer Price Index (CPI), has spiked to 7.41% in September 2022, up from 7% a month ago.
The Wholesale price index (WPI) based inflation data for the month of September 2022 cooled a bit to 10.7% (according to the Ministry of Commerce & Industry) down from 14.07% for July.
These numbers are quite staggering and do carry a lot of political weight.
Impact on GST due to inflation?
Inflation is likely to put a lid on the plans to rationalise or reduce the number of GST rates – at least for now.
The group of ministers (GoM) on rate rationalisation, headed by Karnataka chief minister Basavaraj Bommai, which was supposed to submit its report by this month’s end, has not met since June-end.
Officials said that several states had voiced concerns about the rejig of rates, which could further increase “expectations of price increases” amidst inflationary pressure on the economy.
As per sources one of the proposals under consideration is a three-rate structure of 8 percent, 15 percent and 30 percent.
At present, there are three rates – 5 percent, 12 percent and 18 percent and one de-merit rate of 28 percent.
According to some estimates raising the 5 percent slab to 8 percent may yield an additional Rs 1.50 lakh crore in annual revenues.
As per calculations, even a 1 percent increase in the lowest slab, which mainly includes packaged food items, results in a revenue gain of Rs 50,000 crore annually. But the reason the government may not opt to do this as all food item inflation is already at a 11.07% for September and any further changes in these circumstances could play havoc with prices and consumer sentiment.
India is a growing economy and hence some inflation is expected to be good, but higher than normal inflation (the RBI’s mandate is to maintain it between 2% - 6%) is not good for consumer sentiments and may discourage spending, pushing overall demand down and hence revenue may dip with raising taxes.
Merging the 12 percent and 18 percent slabs into any rate lower than 18 percent may also result in revenue loss, the study by the National Institute of Public Finance and Policy said.
GST will definitely get impacted by inflation, as policymakers will always tweak GST policy based on the track of inflation based on historical data. In the coming FY23 we can see GST rate changes could be done to counter some of the inflationationary effects that are happening due to global economic pressures.