The GST Council’s decision to lower rates on nearly 100 goods and also rationalise rates on some services will impact government’s fiscal consolidation effort, a research report by Moody’s Investors Service said on Monday.
Following the GST Council decision, Centre and States notified cuts on goods with effect from July 27. These cuts will be applicable mainly on 17 categories of white goods such as smaller TV, fridge, washing machines etc, sanitary napkins, handloom and handicraft goods. It is estimated that rate cuts on goods and change in methodology for rate calculation on some services will cost the government approximately ₹9,000 crore.
Also, refund of accumulated credit on account of inverted duty structure to fabric manufacturers will require ₹6,000 crore, taking total revenue loss on account the latest decision to ₹15,000 crore.
The research note said 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 put pressure on the government’s fiscal consolidation effort, which is already diminished relative to the original fiscal deficit target set last fiscal year.
“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.
It took note of the Government’s expectation about GST revenue adding 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 ₹7.4 lakh crore($100 billion) for the full fiscal year,” it said. Early this year, the Government revised the fiscal deficit upwards for fiscal year 2017-18 to 3.5 per cent from 3.2 per cent and for the fiscal year 2018-19 to 3.3 per cent from 3 per cent.