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Moody's spies fiscal strain after GST cut

The latest round of rate rejig in the goods and services tax (GST) will weigh on the government's fiscal consolidation efforts and is "credit negative" for the country, global rating agency Moody's Investors Service has said.

By Our Special Correspondent
  • Published 31.07.18
  •  

New Delhi: The latest round of rate rejig in the goods and services tax (GST) will weigh on the government's fiscal consolidation efforts and is "credit negative" for the country, global rating agency Moody's Investors Service has said.

"We estimate revenue loss from the most recent tax cuts to be about 0.04-0.08 per cent of the gross domestic product (GDP) annually. Although the proportion of revenue loss is small, the vacillation in tax rates creates uncertainty around government revenue and comes amid persistent upside risks to its expenditures," Moody's said in a statement.

"The tax cuts will weigh on the government's revenue collections and are credit negative because they will put pressure on the government's fiscal consolidation effort, which is already diminished relative to the original fiscal deficit targets set last fiscal year," Moody's said.

According to estimates, the recent GST rate cut would lead to a revenue loss of about Rs 8,000-10,000 crore, but the government expects more compliance and demand will lead to revenue buoyancy which will offset the loss in the long run.

The estimated loss in revenues comes at a time the country needs to keep its budget deficit in check as the Narendra Modi-government prepares to ramp up spending in welfare programmes before the general elections next year.

The government has already revised it deficit goal for the current financial year to 3.3 per cent of GDP from 3 per cent.

Moody's had upgraded India in November 2017, citing a host of reforms undertaken by the government. Among them was the implementation of the GST, which it believed would held expand the tax base in India.

While GST collections have increased since December 2017, changes in tax rates could create downside risks for the tax collection targets for the full year, Moody's said.

The GST Council last week cut tax rates on white goods as well as various handicraft items and paints.

The government expects GST revenue to add up to an additional 1.5 per cent of GDP in the medium term.

According to Moody's , the government had budgeted a gross tax revenue growth of 16.7 per cent for the current fiscal, and GST collections will be an important driver of future government revenue because of a wider tax base and tax buoyancy.