Cut in ST rate to lower commodity prices: FBR report: analysis of RGST on inflation

A new report of the Federal Board of Revenue on the inflationary impact of the reformed general sales tax (RGST) revealed that the reduction in sales tax rate from 17 to 15 percent will reduce prices of 43 categories of commodities and goods having 30.51 percent weight in consumer price index (CPI) basket.
The FBR report, "Analysis of RGST on inflation" issued here on Wednesday said that the impact of inflation "only" due to implementation of RGST may be nearly one percent. The major inflationary impact will come from imposition of RGST on such goods, which are currently exempted from GST. This is first of its kind of report of the government on the inflationary impact of the RGST on goods.
It is generally argued by many people that RGST will increase inflationary pressure whereas experts have predicted that the overall impact of RGST would be 0.59 percentage points. This result is based on CPI data of 374 items comprising 92 broader groups of products. An analysis has been carried out by experts, reveals that out of 92 categories of commodities 29 broader categories are having 55.9 percent weight in CPI basket and will remain exempt from R-GST levy. Only 13 categories having 8.29 percent weight in CPI basket will be taxed under Federal RGST, while 7 categories having 5.28 percent weight will be taxed under Provincial R-GST law. The reduced RGST rate of 15% from 17% will benefit 43 categories having 30.51 percent weight in CPI basket.
Another analysis based on whole sale price and retail price has suggested that there is marginal difference between average price with ST and average price with RGST. The major inflationary impact will come from imposition of RGST on such goods, which are currently exempted from GST, while the prices of goods on which ST is already levied will decline. As a whole an average prices will decline by 0.58 percentage point.
The issue of inflationary impact of RGST is debatable as there are number of ways of calculation. However, it can safely be said that the impact of inflation "only" due to implementation of RGST may, as a whole, range between 0.59-1.0 percentage points.
It can be concluded with a note that apart from taping the untaxed areas, the government must go for implementation of the RGST. Economic decisions are always taken in the best interest of the nation irrespective of consensus. Moreover, success of the proposed RGST would largely depend on the homework done by FBR, political determination of the government. A well tested automated accounting and reporting mechanism together with effective audit and enforcement system, capacity building of the tax machinery and awareness of the taxpayers is the key of success of RGST in Pakistan, the report added.