The Goods and Services Tax (GST) Council finalised the rates for most goods and services at its two-day conclave held on May 18-19, 2017, paving the way for the implementation of the GST from July 1, 2017. The Council has decided which goods and services would fall in the various slabs of GST rates, namely 0%, 5%, 12%, 18% and 28%.

The effective tax rate after adjusting for input tax credit and removal of cascading, is intended to be brought down on most items. Moreover, a large portion of the goods in the CPI basket are being kept in the exempt category. However, the pending decisions regarding area-based exemptions (and exports promotion schemes) could impact output prices for some corporate (and exporters). The standard rate for services has been kept at 18%, and some services are to be taxed at 28%, which was not expected, higher than the extant levy of 15% (inclusive of various cesses). However, the availability of input tax credit may soften the impact of the GST on services inflation. Moreover, education and healthcare, which form over 10% of the CPI basket, are to be exempt from the levy of GST. While the structure of rates appears to cushion inflation risks and the state governments' revenue growth would anyway be protected through the compensation mechanism, it raises concerns regarding the revenue buoyancy for the central government post-GST.

Although tax rates for goods will now be common across states, the multiplicity of slabs for goods and services suggests that the overall tax structure would remain complex. ICRA expects industry to pare inventory levels during the transition to the GST, mildly dampening production in Q1 FY2018. Moreover, Q2 FY2018 and Q3 FY2018 are likely to witness some adjustment, as the assessees get used to the new compliance procedures and higher working capital requirements. The positive impact of the GST on economic activity is likely to be visible from Q4 FY2018 onward. While inflation risks related to the GST and the monsoon outlook appear to have eased relative to the earlier assessment, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) may nevertheless choose to wait for greater clarity on such factors, prior to reducing the policy rate or reversing the stance back to accommodative from neutral. However, the tone of the upcoming policy review is likely to be less hawkish than the April 2017 policy document and minutes of the MPC meeting.

The introduction of the GST is likely reduce the competitiveness of the unorganised sector. ICRA anticipates a relatively healthier expansion of the organised sectors in FY2018, at the cost of the unorganised sectors.