How do GST Rates Drive Inflation?
The inflation rates of any nation can be simply measured with the Consumer Price Index Inflation (CPI). The CPI simply measures the change in the price of a specific category of goods and services over a specific period. The prices of any goods and services go up and down with the change in taxation rates, raw material prices, and production efficiency, etc. In India GST rates stand out as one of the major factors affecting the price of goods and services.
- The government of India has different GST rates for different kinds of Goods and Services. And these GST rates are applied to specific goods and services keeping in mind their demand and supply.
- The government tends to keep nominal GST rates on basic goods like groceries, stationary, and food items, while keeping high GST rates on luxury items such as liquor, Cigarettes, etc.
- The GST rates on any goods or services are not fixed and they can be varied by the government considering their demand and availability.
- Along with the Repo rate and reverse repo rate, the GOI also uses GST rates to control the inflation rate in India.
According to an RBI report, more than 50% of goods and services with GST applicable are not considered under the CPI basket.
Impact of GST on Inflation
GST was introduced in India to waive off indirect taxes on all goods and services and introduce a single direct taxation system, which will lower the prices of essential goods and services. But it seems like it didn’t happen, as of now in 2022, it’s more than 5 years after the launch of GST in India. Within 1 year of the launch of the GST, the CPI inflation increased from 3.66% to 4.24%. However many economists believe that an increase in the CPI in the initial phase was obvious and it aimed to maintain inflation rates for the long term.