Taking stock of five years of GST

Contact Counsellor

Last Updated08/07/2022

Before 12 months of GST implementation, Consumer Price Index (CPI) inflation was 3.66%, while it increased to 4.24% post-GST in the next 12 months.

India is not alone in witnessing higher inflation.
Similar pattern was observed in Australia, New Zealand, and Canada.
An Australian Competition and Consumer Commission study showed that GST initially increases inflation.

Revenue-neutral rate (RNR) is calculated so that it would not cause higher inflation.
But revenue neutrality does not mean that prices would not go up or down.
Weight of goods in the consumption basket and their contributions to indirect tax collections are not the same.
Eg: food and drinks ( 46% of the CPI index), rent, and clothing are all significant parts of CPI basket that are either not taxed or taxed at low rates.
RBI report(2017):
Many items that GST covers are not in CPI basket.
Effect of GST on prices was expected to be small.
Prior to GST implementation, it was expected that prices would go down because GST harmonises indirect tax rates and eliminates the cascading effect.
Thus, whether GST has any effect depends on how different factors affect each other.

CPI: Without GST implementation, CPI inflation would have been 3.24%.
With implementation it increased by 1.37 %.
CPI core inflation: Increased by 1.04pp in the post-GST period.
GST had a positive impact on inflation of commodity groups such as paan, tobacco and intoxicants, clothing and footwear, housing, and miscellaneous sectors.
Non-exempted food and beverages: Negative impact of 4.42% on price levels.

Reasons for rise
Rise in the tax rate of some goods and services
Inclusion of business activities that were not taxed earlier
Market structure.
Average weighted GST rate was designed to be neutral, so it might not have contributed much to higher inflation.
When market power increases, prices increase, and profit follows.
Joseph Stiglitz: Rising market power is bad for the economy as it raises economic inefficiency and lowers the economy's resiliency.
Taking advantage of market power, it is possible that most firms would have passed taxes to end consumers, resulting in cost-push inflationary impact of the GST.

GST implementation has resulted in decrease in inflation of food items and raised inflation of non-food items.
Prior to GST implementation, market concentration measured by various indicators was rising, suggesting an oligopolistic market structure.
This determines whether benefits of GST are passed down to the consumers or not.
Results point out the possibility of profiteering in some segments after GST.