Will GST cause an increase in consumer prices ?

The passage of the Constitutional Amendment Bill on GST has paved the way for the introduction of GST in India. The need for GST has been felt because under the current indirect tax structure:
1) Tax barriers have fragmented the Indian market,
2) Cascading effects of taxes on cost have made indigenous manufacture less attractive,
3) Complex multiple taxes have raised cost of compliance.

These multiple taxes are nothing but a route to cheat people. Many suppliers use the mechanism to sell product from states which have a lower tax than the other.  GST is a welcome move as there will be more transparency in the system. There will be a common market in the absence of CST and entry tax. The GST Council has finalised a four-tier GST tax structure of 5%, 12%, 18% and 28%, with lower rates for essential items and the highest for luxury and de-merits goods. The objective is to dilute the distinction between goods and services but some distinction may be needed, at least in the initial phase, so that the change in taxes for services isn’t too sharp. The expected change in prices due to GST can be broadly explained as below:

• GST seeks to convert all states into a single market with one indirect taxation system which will lead to no difference in prices in different states. Prices of goods may not be completely uniform across states as there is talk of allowing states to have 1-2% variance in tax but the difference won’t be much when GST comes into play.

• Tax experts claim that the current practice of tax on tax will go once GST is rolled out. This will help bring down prices of a range of products — from FMCG to consumer durables and electronics to readymade garments.

• Goods which currently attract low rate of tax like small cars (excise duty of 8 per cent), the impact of GST might bring about a hike in price.

• Services are expected to become more expensive with the introduction of GST regime.

As of now we cannot predict anything specifically. Once the rate structure of various items is decided then only we can predict the items on which prices will go up or come down. Apart from that, two levels of GST—state and Centre—also means multiple compliances. This could mean stricter compliance and audit but also an increase in cost of compliance. A recent note from HSBC Global Research stated that although the growth impact of GST on the economy is difficult to quantify, a positive impact of 100-150 basis points (bps) can be considered “ideal”.

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