Tax Cuts Deny India $2 Billion in Annual Revenue
(Bloomberg) -- India’s move to slash levies on more than 50 goods will lower revenue by as much as 150 billion rupees ($2.2 billion) each year and is raising the prospect of the country missing budget goals again this year.
A panel of federal and state finance ministers late on Saturday cut the goods and services tax on items from washing machines and lithium iron batteries to stone-carved deities and sanitary napkins as Prime Minister Narendra Modi looks to boost sentiment and growth before he faces re-election next year. The revenue loss will be minimal, India’s interim Finance Minister Piyush Goyal told reporters in New Delhi, without elaborating.
The decision could result in a revenue loss that’s as high as 1 percent of tax budgeted to accrue to the federal government, according to officials who didn’t wish to be identified as they aren’t authorized to speak to the media.
The estimated loss in revenues comes at a time when India needs to keep its budget deficit in check as Modi prepares to ramp up spending on welfare programs from health to farming before general elections next year. The government has already widened its deficit goal for the current fiscal year to 3.3 percent of gross domestic product from 3 percent, putting pressure on bond yields.
The benchmark 10-year yield is up nearly 50 basis points this year, after climbing 81 basis points last year.
“It may not be the most marvelous move for the overall budget, but it is not a bad deal either if overall collections pick up for the government,” said Indranil Pan, chief economist at IDFC Bank Ltd. in Mumbai. “These rates were expected to come down and have been advanced because of the election cycle.”
The new GST rates are effective July 27 and the panel will meet again Aug. 4 to discuss issues faced by small businesses.
What Our Economists Say...Reductions in India’s tax rates on a host of consumer goods and services should -- at the margin -- help counter strengthening headwinds to growth from higher oil prices, rising borrowing costs and mounting bad debts at public banks. The cuts are likely to bring down core inflation and boost consumption demand.
-- Abhishek Gupta, Bloomberg Economics
Read More: GST Cuts, at Margin, to Counter Growth Headwinds
India’s GST is just over one-year-old and the panel has already revised rates several times. The latest reduction comes before polls later this year in the states of Madhya Pradesh and Rajasthan, both governed by Modi’s Bharatiya Janata Party. Tax cuts on the last few occasions came closer to the date of some state polls, lending strength to arguments it was done for electoral gains.
Modi needs resources to boost welfare spending before the federal election in 2019. Monthly GST receipts have picked up after teething troubles, but are still not strong enough to meet the government’s annual tax target of about 15 trillion rupees.
GST, touted as one of the biggest reforms of the Modi government, replaced a myriad of levies with a nationwide sales tax. Its introduction was marred by glitches and business disruptions.
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