According to a report by financial service provider Nomura, the reduction of Goods and Services Tax (GST) rates is likely to ease retail inflation by 20 basis points. The effect of lower GST, when passed to customers at the retail level, will lead to lower prices of various consumer goods. This will reduce the overall CPI (consumer price index) inflation or retail inflation in the country.
In the month of October, retail inflation increased to 3.58% due to a significant increase in the prices of foods, especially vegetables. CPI inflation at this rate represents a 7-month high as per the data released by Central Statistics Office. The data also showed that inflation in urban India (3.81%) is higher than the inflation in rural India (3.36%).
With this increase in retail inflation, it is also expected that the Reserve Bank of India (RBI) will come up with an interest rate cut in its upcoming monetary policy review.
The report by Nomura maintained that the government expects this tax cut to be disinflationary. When fully passed to consumers, the tax reduction by the government will contribute to reduced inflation. The decline in inflation rate will be driven by price reduction in food, beverages, household items, personal care items, etc.
The 23rd GST Council meeting held on November 10 lowered the tax rate on about 213 items including about 178 items that fell in the highest 28% tax category. With this new tax rate cut, the prices of various consumer goods including chocolates, marbles, granites, furniture, chewing gum, beauty products, construction materials, etc. are expected to come down in the near future.
The modified tax rates are coming into effect from today (November 15) onwards. The report noted that the tax relief was provided to the general public as a measure to deal with the economic slowdown.
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