GST Bill's passage credit positive for India rating: Moody's

The passage of GST Bill in the Rajya Sabha is "credit positive" for India's sovereign rating as the rollout of Goods and Services Tax regime will have a favourable impact on growth and tax revenues, Moody's Investors Service said today.
"The short-term sovereign credit implications of the GST bill will be limited, given that effective implementation will take some time, and as the GST rates are likely to be chosen as revenue neutral," Moody's said.
It added: "The GST will support economic activity and government revenues over the medium term by removing a key hurdle to the smooth movement of goods and services, and reducing corporates' and the government's tax administration costs, thereby improving compliance and raising tax receipts."

In a report titled, 'Upper House Passage Paves Way for GST Bill Implementation, a Credit Positive', Moody's said the new tax regime will be broadly positive for Indian non-financial corporates, although the overall impact will vary across sectors.
GST will lead to much simpler administrative framework, reducing tax governing costs for corporates, and over time, improving the overall cost competitiveness of corporate India.
It will also likely translate into swifter mobility of goods between states by removing the barriers present under the existing regime, it said.

"The overall impact is likely to vary across sectors, with some of the highest tax payers under the current regime, such as automotives, standing to gain the most," Moody's said.

Rajya Sabha on August 3 passed a constitutional amendment to allow implementation of the long-delayed GST. The Bill will now go to Lok Sabha next week.
The Bill will then have to be ratified by 50 per cent of the state legislative assemblies, and the actual GST bill will need to be enacted into law by the Lok Sabha and by state governments.
Moody's said the new GST structure follows a dual taxation model with powers granted to the central and state governments to tax both goods and services under a common structure.
It will replace the existing system of multiple taxes, imposed at different stages of the value chain, with a single unified tax.

Last December, a committee headed by the Chief Economic Adviser recommended a revenue neutral range of 15-15.5 per cent with a preference for the lower end of that range.
(Reopens DEL 25)
Moody's said GST will have a significant impact on relative prices since the effective total tax rate on some goods will fall as taxes are removed and replaced by a lower- rate GST while other goods and services will be taxed at a higher effective rate than under the current regime.
"However, we assume that the GST will have a negligible impact on overall inflation in line with the revenue-neutral objective. This is because the lower GST rate and the additional levies are likely to largely offset one another," it added.

Moody's said the GST is likely to have a positive impact on India's economy in the medium term.
The GST, a value-added tax, will replace various taxes, some of which are based on revenues.
"Value-added taxes are less distortionary as they incentivise corporates to focus their production on their core businesses and to rely on goods and services inputs that are produced more efficiently by suppliers," Moody's said.
"In this respect, an increase in the number of exemptions would be credit negative as it would distort choices for consumers towards GST-free goods and services," it said, hoping the list of exemptions will not be larger than current and will be more restricted.

Also, since goods and services are taxed at the point of consumption rather than production, corporates can focus their decisions on the location of production on operational considerations, including the availability of skills and the proximity of suppliers and distributors, rather than on the different tax regimes applied across states.
This may lead to productivity gains.
The current tax system is complex, with multiple taxes and excise levied within and between states, at different rates, on different bases and each with a set of exemptions.
Unifying a wide range of taxes under a much simpler system, even if it includes a few different rates and exemptions, would significantly reduce the tax filing costs of corporates and enhance their competitiveness, it said.

"Notwithstanding the expected lower tax rates, it is premature to quantify the precise impact on individual sectors, pending a seamless transition and likely challenges in the interim. The overall impact is likely to vary across sectors," it added.
The automotive industry is likely to be a chief beneficiary of the new GST regime. Lower GST rates will further support strong demand for the industry by reducing product pricing and stimulating consumer demand.
The effective GST rate is expected to be far lower than the multiple taxes currently imposed on the sector, including sales tax, excise duties, local taxes (known as octroi), and value-added tax.