How did Transition to the GST Regime Affect Inflation in India?
Publication dateFeb, 2024
DetailsNIPFP Working Paper No. 405
Indian indirect tax regime shifted from multiple tax system to a uniform rate value added Goods and Services tax regime on the 1st July 2017. There have been long standing public debate on probable costs and benefits of GST regime replacing long-existed multiple tax regime. In the cost side, while producers and sellers may have to incur some fixed cost at the beginning of the regime to comply with the government rates and structures, shift to GST system is expected to reduce prices via reducing cascading effects of multiple tax layers and increasing efficiency of the logistics and distribution system. Empirical literature on both advanced and developing economies suggest mixed impact of adopting GST system on inflation. This paper contributes to this literature by investigating effects of GST system on CPI, WPI inflation and their major components namely food and core inflation in India. Applying intervention method in a multivariate framework, controlling for other macroeconomic shocks and duration of intervention endogenously identified using structural breaks in inflation series, we find a positive effect of GST on headline inflation in India via inflationary impact on retail food prices.
JEL Classification: C54, E31, E65
Keywords: GST, Inflation, Structural breaks, Intervention method, India.