GST Rate Cuts Credit Negative For India, Says Moody’s
The recent cuts in rates of Goods and Services Tax will weigh on the Indian government’s fiscal consolidation efforts and are ‘credit negative’ for the country, said global rating agency Moody’s Investors Service in a note on Monday.
“The tax cuts 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,” Moody’s said.
The rating agency had upgraded India in November 2017, citing a host of reforms undertaken by the government. Among them was the implementation of GST, which Moody’s believed would held expand the tax base in India. While GST collections have increased since December 2017, changes to tax rates could create downside risks for the tax collection targets for the full year, Moody’s said.
In its latest meeting on July 22, the GST Council reduced the tax rate on over 50 goods, including washing machines, refrigerators, vacuum cleaners, paints, ethanol, cosmetics, sanitary napkins. The rating agency forecasts revenue loss from these tax cuts to be around 0.04-0.08 percent of 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 Research Report
Moody’s added that while it believed that the fiscal deficit of 3.3 percent of GDP for the current year is achievable, downside risks have emerged due to the shortfall in GST collections. Meanwhile, expenditure could see upside pressure due to the new minimum support prices (MSP) announced for agricultural products and higher social spending, the rating agency said.
Overall, we expect a general government (combined central and state) fiscal deficit near 6.3 percent of GDP in fiscal 2018, significantly wider than the 2.6 percent ‘Baa’-peer median. Continued large fiscal deficits will likely result in a debt burden that remains elevated at around 68 percent of GDP over the next two years.Moody’s Investors Service