GST changes from Monday may put pressure on retail inflation: Experts

Falling global commodity prices may neutralise the impact, say experts

A 5 per cent goods and services tax (GST) on pre-packaged unbranded food items from Monday onwards may push up retail price inflation moderately but this is likely to be more than neutralised by falling global commodity prices, as well as easing vegetable and fruit rates domestically, said experts.

Also, Karnataka Chief Minister Basavaraj Bommai, a member of the GST Council, told reporters in Bengaluru that he would ask the Central Board of Indirect Taxes and Customs (CBIC) to issue relevant directions on reimbursement so that the GST hike on food items is not passed on to the consumer.

The new GST rate applies to items such as wheat, rice, curd, honey, mutton, and fish, which are packaged but unbranded or sold under unregistered brand names. Only up to 25 kg of pre-packaged food items, such as wheat, rice, and flour, will attract GST, the CBIC clarified on Sunday. 

The 5 per cent GST was also imposed on rooms which are rented above Rs 5,000 in non-ICU hospitals. Also, there will be 12 per cent GST on hotel rooms which are rented at less than Rs 1,000 per day, and 18 per cent tax on the fee charged by banks for issuing cheque books and also on LED lights. Blades, scissors, paper, pencil sharpeners, spoons, and forked spoons are among items for which the GST rate has been increased to 18 per cent, from 12 per cent.

Sakshi Gupta, principal economist at HDFC Bank Treasury, told Business Standard that there is likely to be a 10-15-basis point impact on inflation in July and August because of these moves.

“Although with the decline in food and fuel inflation, headline inflation prints could surprise on the downside in the next three months,” she said. Food inflation can be pulled down by vegetables, vegetable oils, and fruits.

Edible oil firm Adani Wilmar, which sells its products under the Fortune brand, on Monday announced a reduction in cooking oil prices by up to Rs 30 per litre amid a fall in global prices. The maximum reduction has been done in soybean oil. The stocks with new prices will reach the market soon. 

Yuvika Singhal, an economist at QuantEco Research, said while the GST Council focused on rationalising rates and rectifying the inverted duty structure, rate hikes on household consumption items are bound to add pressure on retail inflation.

“Unbranded wheat and rice, several dairy items, honey, jaggery, and puffed, rice among others, are now attracting GST at the lowest slab of 5 per cent and these are bound to add to food inflation and perhaps marginally to inflationary expectations,” she said.

Inflation’s impact on the GST rate rationalisation will be more pronounced in lower-income households. “Typically, the impact of GST rate hikes is seen to be captured in CPI-based inflation with almost immediate effect, expected to reflect in prints of July and August," Singhal said.

Global commodity prices

But, a sharp correction in global commodity prices seen in recent weeks is likely to outweigh the GST-related upside in inflation, Singhal said.

Retail price inflation moderated to 7.01 per cent in June, from 7.04 per cent in May. Still, it was more than 6 per cent, the mandated upper tolerance limit for the monetary policy committee, for six months in a row. Retail food inflation declined to 7.75 per cent in June, from 7.95 per cent in May.

M S Mani, a partner at Deloitte India, said as indirect taxes like GST are borne by the final consumer in the value chain, the inflationary impact on consumer products should be considered before increasing rates.

To a query from reporters as to why 5 per cent GST was imposed on puffed rice, curd, and milk when inflation was already high, the Karnataka chief minister said: “We have imposed GST only on packaged and branded milk and curd. Such sellers have the option of claiming reimbursement. If they apply for reimbursements, there will be no need to pass on the additional cost to customers. I will ask the GST Council to issue the relevant directions in this regard.”

Madan Sabnavis, chief economist at Bank of Baroda, however, said the new GST rate on pre-packaged unbranded food items won’t impact overall inflation much. “This is also because prices of some of these unorganised sector brands would not be reported in the inflation data. So even if prices go up, it won't be reported,” he said.

Unregistered local brands in food items earlier did not pay GST, while registered brands paid 5 per cent GST. All such brands sold in the packed form will now attract 5 per cent GST, provided their turnover is more than Rs 40 lakh in a year. This amounts to around Rs 3.5 lakh in a month or slightly over Rs 11,000 in a day.

B C Bhartia, president of the Confederation of All India Traders (CAIT), and Praveen Khandelwal, the group’s secretary general, said unbranded food items may become costlier and put a financial burden on the common man.

A tax expert said many local unregistered brands have become big and will now have to pay 5 per cent GST. The expert rejected the government’s argument that millers would now get an input tax credit on their capital goods since most brands in the unorganised sector did not attract GST.

He said new mills are not coming up in large numbers in the country. Even if they are set up, these would be only a few. So, GST will be paid on output but millers would not get ITC on capital expenditure on existing mills, he pointed out.