Will GST tweak spur inflation?

The GST Council, the policy-making body for the Goods and Services Tax, has decided to rationalise tax levied on certain goods and services, triggering fears of stoking an already high inflation. While several proposals were approved by the council, the key cause of concern was its decision to levy five per cent tax on unbranded pre-packed and labelled food items. Hitherto only branded versions of these items attracted indirect tax. The move could affect families of lower middle class, who typically buy unbranded food items, which are pre-packed by shopkeepers for their convenience. This decision, however, is unlikely to shore up tax collection, as the shopkeepers may now prefer to sell food items without packing.

The council has also decided to levy a 12 per cent tax on hotel rooms that attract a rent of less than `1,000 a day. While the hotel industry could pass on the tax to its customers, the decision could affect the financial recovery of the budget hotels which bore the brunt of the Covid pandemic. The decision to increase the GST rate for kitchen utensils and LED lamps from 12 per cent to 18 per cent was also not advisable as inflation stood at 7.04 per cent in May, which is 75 basis points lower than the eight-year high. Barring these items, other proposals apply to goods and services that are not recurring in nature and could be absorbed by businesses without greatly affecting inflation.

The just-concluded council meet was also significant as four states reportedly spoke of evolving their own revenue stream to break from the GST compensation mechanism. Though finance minister Nirmala Sitharaman did not elaborate on the matter, the whole purpose of the GST will collapse if states — empowered by a latest Supreme Court verdict — were to independently tax goods and services in their jurisdiction to raise their revenue.