India recently moved one step closer to the 1 July implementation of the Goods and Services Tax (GST) by announcing the tax rates for 1,211 items on 18 May, 2017. The tax rates for services are yet to be announced. An important issue that is now on the minds of most is whether the new GST rates will add to inflation by increasing the prices that wholesalers, retailers, and customers will pay at every level of the value chain.
The government has been conscious of inflation worries. It committed to putting a GST structure in place that would avoid price escalation. Indeed, with goods sorted into three key tax rate brackets – 5 percent, 12 percent, and 18 percent — most goods would either experience a reduction in price or have no price change at all.
The anti-inflationary objective is being achieved, in part, by keeping 81 percent of taxable goods at the 5 and 12 percent rates. The common man’s consumption basket has been an important benchmark in this respect. Several commonly consumed items like milk, eggs, fruits, vegetables, honey, fish, chicken, curd, and salt have been exempted from GST, as have articles like newspapers and stamps. Other items like coffee, tea, and spices will attract GST of 12 percent, as would fruit juices, ayurvedic medicines, tooth powder, and cellphones.
The food processing industry might be disappointed that jams, sauces, instant food mixes, preserved vegetables, cakes, pastries, and ice cream will be taxed at 18 percent. Indeed, compared with food items that are not being taxed, or those taxed at 5 or 12 percent, the 18 percent tax on processed foods appears to reflect an interesting mindset on the part of tax authorities. Namely, that low-income people consume fewer processed foods than their middle-class counterparts, particularly those in urban areas. However, this line of thinking doesn’t account for the gradual changes in the dietary patterns of Indian consumers, with more and more low-income urban households consuming significant amounts of processed foods.
Likewise, taxing soups, refined sugar, corn flakes, and cereal and milk preparations for infants could be burdensome for the urban middle class. This is where the GST structure fails to provide inflation relief: to the urban middle class.
The middle class will also likely not be pleased with aerated water, shaving creams, and washing machines attracting the highest GST rate of 28 percent. Aerated water in many respects is a necessity in India. The poor quality of municipal water has increased household reliance on aerated water. There was an opportunity to reduce the consumer price for this item, but it was overlooked by allowing the GST rate to remain at 28 percent.
The other interesting group of products that would be taxed at the highest rate of 28 percent is automobiles. Small passenger cars would now experience an effective tax rate of 32 percent, which would include 28 percent GST and two individual cesses of 1 percent and 3 percent each. Small car buyers would now have to pay 3 to 4 percent more than the current rate of 25 – 27 percent, including central excise of 12.5 percent and state VAT of 12.5 – 14.5 percent. Luxury cars would be taxed at even higher rates. There are concerns over how these increases will affect India’s prospects of becoming a manufacturing hub for small cars under the government’s Make in India initiative.
Overall, the GST structure reflects government’s efforts to keep consumer prices low or unchanged. However, for the urban middle class, consumer prices and tax burdens are not expected to improve. Indeed, in some respects, they might get worse — something that’s unavoidable given that GST is intended to generate revenue. Indeed, if states lose revenue after adopting GST, it will be the Central Government that recompensates them for the loss. Items like passenger cars, therefore, must be taxed at high rates.
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