Timely GST roll out challenge; inflation impact limited: RBI
New Delhi : Reserve Bank today said the April 1, 2017 deadline for rolling out the Goods and Services Tax is a challenge but the new indirect tax regime will have a “limited” impact on price rise as more than half of the items in retail inflation basket are out of GST ambit.
In its third bi-monthly monetary policy review, the RBI said the passage of the GST Bill “augurs well” for the growing political consensus for economic reforms and will boost business sentiment and eventually investment.
Dispelling fears of price rise due to the rollout of Goods and Services Tax, RBI Governor Raghuram Rajan said its impact could be assessed only after the GST rate is decided and inflation could be short-lived as seen in many other countries.
“It is premature to talk about inflationary impact of GST when we don’t know what the rates would be. The experience of other countries, like Malaysia, has been that the inflationary impact was short-lived. We have to see that price adjustment, if there is one, doesn’t become generalised inflation,” he said.
RBI Deputy Governor Urjit Patel said about 55 per cent of Consumer Price Index basket will not be impacted by GST and since the cascading effect of ‘tax-on-tax’ disappears, so the effective rate on many goods and services will come down.
“As the base expands, you don’t need to have a tax rate as high. Firstly, inflationary impact could be one time. Secondly, the large part of CPI basket will be outside, and the durable impact on it is likely to be limited,” Patel said.
The full effects of GST on inflation will be felt in the second half of next financial year, he added.
Rajan, in his last monetary policy before he exits on September 4, said while timely implementation of GST will be challenging, there is no doubt that it should raise returns to investment across much of the economy, even while strengthening government finances over the medium term.
The GST Constitutional Amendment Bill was approved by the Rajya Sabha recently and the government is working hard to meet the April 1, 2017 deadline for rolling out the new indirect tax regime.
Talking to reporters at the customary post monetary policy press conference, Rajan said: “A lot depends on which prices go up, which prices come down, some prices may as well come down. The RBI is currently focused on meeting the glide path target of 5 per cent by March 2017. We do not visualise GST coming in before 2017,” he said.