The Crisil report notes that tax cuts on essentials should improve purchasing power, especially for low-middle income segments
Emphasising that the new goods and services tax (GST) rates will benefit 11 of the top 30 consumption items and a third of an average consumer’s monthly expenditure, a report has highlighted that the extent of spur from GST cuts hinges on passthrough.
Crisil noted that these 11 items include essentials (milk products), discretionary products (automobiles, beauty services) and goods seeing a surge in demand over the past few years (processed food). Tax cuts on essentials should improve purchasing power, especially for low-middle income segments. Additionally, for some categories, the GST rates have been pared for only lower-value items, the report pointed out.
“The change in consumption will depend on the degree to which producers pass the rate cuts to consumers. Global evidence confirms that passthrough of tax changes varies significantly across countries. Furthermore, the adjustment can take time. For India, we expect the impact of GST cuts on consumption to play out over this fiscal and the next,” the report added.
Consumption tax cuts in other countries have shown 25 to 100 per cent passthrough. The 2008 Vat cut in France had a limited impact on consumption since producers retained a chunk of the benefit, the report explained.
Encouragingly, most of the rate cuts are concentrated on essential goods and some discretionary items typically consumed by the middle class. Therefore, if transmission is swift, it should enable faster passthrough, ease inflationary pressure and support household consumption, thereby strengthening demand.
The report pointed out that over 20 per cent of the consumer price inflation basket faces GST rate cuts. By contrast, only 1.2 per cent of the basket faces a rate increase, as most items under the special ‘demerit rate’ category account for a negligible share in the average Indian’s consumer basket.
