GST Cut on 88 Items is ‘Credit Negative’: Moody’s

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Estimates by the agency say that the government will have to face the impacts of the GST cut and suffer around Rs 8,000 to Rs 10,000 crore revenue loss

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Following the recent Goods and Services Tax (GST) cut, rating agency Moody’s on Monday said that the reduction on 88 products will impact the government’s revenue collection and is ‘credit negative’ because it will put pressure on fiscal consolidation efforts.

Govt’s aim of 16.7 per cent gross tax revenue growth will be impacted by GST cut

Moody’s said in a statement that the government had budgeted 16.7 per cent of gross tax revenue growth for the current financial year of 2018-19, and GST collections will be a key factor to of government revenue due to wider tax and tax buoyancy.

Moody’s said in a statement: “We estimate revenue loss from the most recent tax cuts to be about 0.04%-0.08% 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.”

The agency explained that the tax cuts that follow trims in January 2018 and November 2017, will impact on government’s revenue collections and are ‘credit negative’ because of its pressure on fiscal consolidation effort, which is any way reduced vis-à-vis to the original financial deficit targets set last financial year.

As per Moody’s estimates, the GST reduction would cater to a revenue loss of approximately Rs 8,000 to Rs 10,000 crore. However, the government believes that more compliance and demand would cause revenue buoyancy that would offset the loss.

Irrespective of initial disruption, GST collection has seen a hike

The government expects that GST revenue will add up to an additional 1.5 per cent of GDP in the medium-term. Despite initial hurdle, while implementing GST, the government has seen tax collection increase since December 2017. However, iterative changes to tax rates create downside risks to the target of US$ 100 billion (Rs 7.4 lakh crore) for the entire fiscal year, Moody’s added.

Union Finance Minister, Piyush Goyal, chaired GST council, had announced its decision to reduce the 28 per cent GST cut on 88 items, including handicrafts and paints, to 18 per cent GST cut effective July 27, 2018.

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