Taking stock of five years of GST

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Taking stock of five years of GST

  • 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.

High inflation and GST

  • 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.

Understanding the mechanism

  • 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.

Impact of GST on price levels

  • 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.

Rise in inflation post GST

  • 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.