Recent GST rate cut is credit negative, revenue may take 0.08% hit: Moody's

GST rate cuts are credit negative because they will pressure the government's fiscal consolidation effort

Rating agency Moody's on Monday said the recent GST rate cuts on 88 items will weigh on government's revenue collection and is credit negative as it will put pressure on efforts of fiscal consolidation.

The GST Council, chaired by Union Finance Minister, last week cut tax rates on white goods as well as various handicrafts items and paints.

We estimate revenue loss from the most recent tax cuts to be about 0.04 per cent-0.08 per cent 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 said in a statement.

It said the government had budgeted gross tax revenue growth of 16.7 per cent for the current financial year which ends March 2019, and GST collections will be an important driver of future government revenue because of a wider tax base and tax buoyancy.

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 financial year, Moody's said.

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 financial year, it added.

According to the estimates, the recent goods and services tax (GST) rate cut would lead to a revenue loss of about Rs 80-100 billion, but the government expects that more compliance and demand would lead to revenue buoyancy which would offset the loss.