Will GST Stoke Inflation?

Thu, 25 May Pre-Open

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Here's a different take on the recently finalized goods and services tax (GST) regime: GST could stoke inflation.

Financial markets are bullish that GST will help in reducing the final cost of the goods and services, and thereby, bring inflation down.

However, taking lessons from history, economies that implemented tax systems like GST in the past have experienced a spike in inflation.

An article in The Economic Times refers to a recent study released by the RBI. The study shows that Singapore, Australia, Canada, and New Zealand were among the countries that witnessed a surge in inflation after implementing GST.

Australia witnessed a significant but transitory impact on inflation after it implemented GST in July 2000.

The same was the case with New Zealand and Canada.

New Zealand witnessed a one-off increase in inflation after GST implementation, which normalised after a year. For Canada, too, GST temporarily impacted prices after its implementation.

All of this brings us to ask: Will history repeat itself in India after the GST gets implemented? Will GST stoke inflation in India?

Much depends on how the GST is implemented.

While there has been a rise in inflation in the above stated countries after the implementation of GST, the trend has not lasted too long. Active monitoring of the price rises and accordingly taking appropriate measures have helped these countries to keep inflation under check.

In the long run, a single tax regime has benefitted these countries.

Keeping that in mind, implementation of GST could prove beneficial if the Indian government keep tabs on how prices move after imposition of the tax.

It must also ensure that all the tax reductions under the GST regime gets properly passed on to the end consumer.

As far as the Indian government's views are concerned, it expects that goods and services tax would reduce inflation by 2%. As per Mr Hasmukh Adhia, the revenue secretary of India, the government has taken special care to ensure inflation does not go up.

If this happens to be the case, the same can further mean an interest rate reduction by the Reserve Bank of India (RBI).

We believe, if implemented properly, GST can be a big boost to the Indian economy.

If you would like to dig deeper into the practical implications of GST, I strongly recommend you download Vivek Kaul's free report, What the Mainstream Media DID NOT TELL YOU about GST.

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