New Delhi: The GST Council’s recent decision to slash tax rates on as many 88 goods has not gone down well with rating agencies. Moody’s, on Monday, said that the GST rate cuts will weigh on the government’s revenue collection and is ‘credit negative’ as it will put pressure on efforts of fiscal consolidation.
On 27 July, India’s new lower GST rates on consumer goods ranging from footwear to washing machines took effect.
“The tax cuts, which follow cuts in January 2018 and November 2017, will weigh on the government’s revenue collections and are credit negative because they will pressure the government’s fiscal consolidation effort, which is already diminished relative to the original fiscal deficit targets set last fiscal year,” said Moody’s.
The rating agency said it estimates revenue loss from the most recent tax cuts to be about 0.04-0.08 per cent of GDP annually.
“Although the proportion of revenue loss is small, the vacillation in tax rates creates uncertainty around the government revenue and comes amid persistent upside risks to its expenditures. The government had budgeted gross tax revenue growth of 16.7 per cent for fiscal 2019, which ends March 2020, and GST collections will be an important driver of future government revenue because of a wider tax base and tax buoyancy (the rate of tax revenue growth relative to nominal GDP growth),” it said.
Moody’s pointed out that the government expects GST revenue to add up to an additional 1.5 per cent of GDP in the medium-term. Despite initial disruptions to the GST implementation, GST collection has increased since December 2017 but iterative changes to tax rates create downside risks to the target of Rs 7.4 trillion ($100 billion) for the full fiscal year, it said.
Moody's said shortfall in tax revenue will likely be partly offset by stronger economic growth and improved tax compliance. Small businesses with revenue of less than '50 million make up 93 per cent of registered taxpayers.
“Hence, the majority of taxpayers will benefit from the simplified paperwork, incentivising greater tax compliance. Furthermore, the introduction earlier this year of a new electronic billing system for all interstate movement of goods should also improve compliance and reduce tax leakage,” said the rating agency.
Meanwhile, the GST anti-profiteering authority has sought inputs from Bharti Airtel and Indigo on whether the GST or credit allowed on inputs in the new regime has created room for reduction in prices.
Taking suo-motu cognisance of the impact of GST on prices in telecom and aviation sector, the National Anti-Profiteering Authority (NAPA) has asked the market leaders in the sectors to calculate the input tax credit (ITC) benefits that have accrued to them and whether it was enough to pass on to end-consumers, a source said.
