GST rationalisation may boost consumption, no long-term revenue hit: S&P

Global rating agency S&P on Tuesday said that it does not expect the proposed rate rationalisation under the goods and services tax (GST) to impact revenue collections in the long term, while in the short run it could boost consumption spending.

“With the proposed two rate, the effective rate can be lower but because of easier implementation and accounting processes, there could be a boost to fiscal revenue over the longer term,” said YeeFarn Phua, Director, Sovereign and International Public Finance Ratings, S&P Global Ratings in a webinar on Tuesday.

While it is still very early days to gauge the actual fiscal impact of the proposed move, he said it is unlikely that the government will reform the tax system to the point that it will hit revenues.

Responding to questions during a webinar on ‘Inside India’s Ratings Upgrade: Sovereign, Financial Institutions, and Corporates’, Phua further underlined that over the past five to six years, GST reforms have proven to be very successful and have been a major source of government revenue.

Noting that the GST reforms are being discussed between the Centre and various state governments before the outcome is brought to the GST Council, he said that it will still take some time to play out.

In his Independence Day speech, Prime Minister Narendra Modi announced Next-Generation GST reforms by this Diwali, aimed at reducing taxes on daily-use items. This entails two rates of 5% and 18% along with a higher rate of 40% while doing away with the current rates of 18% and 28% under the indirect tax levy.

A day prior to that, on August 14, S&P Global Ratings had upgraded India’s long-term unsolicited sovereign credit ratings on India to ‘BBB’ from ‘BBB-‘ with a stable outlook, citing the country’s buoyant economic growth, against the backdrop of an enhanced monetary policy environment that anchors inflationary expectations.

Responding to questions on whether the upgrade, which came after a period of 18 years was too little, too late, Phua said that the agency generally takes a long-term view.

“If you look at India's performance as an economy over the past 10-20 years, there's been upcycles, down cycles, economic growth has kind of chugged along. But fiscal numbers, have spiked up and down. Throughout this whole time, we did have a couple of rating outlook changes on India, but we never actually moved the rating up or down, even during bad times because we do believe that the economy is large enough, there is enough space,” he said.

He further noted that there are certain features such as the fact that the government only funds itself in the domestic currency, and (economic) growth is very fast, which helps to stabilise a lot of the credit metrics. In a country, which was smaller and with slower growth, such a fiscal impulse and fiscal deficit could have quite a detrimental effect, but India has been able to smooth this along because of strong growth and a very large domestic market as well.

“We finally recognize that, yes, this is time to move, not because of any single event, but really an observation over the last decade of how a lot of these factors are now coming together to bring India to a stronger growth path,” he said.

The agency also underlined that high US tariffs are unlikely to impact India's long-term growth prospects as the government is focused on economic reforms and trying to improve the standard of living of people. “Going forward, we expect this growth dynamics will continue to play out over 3 years with growth averaging about 6.8%. If infrastructure and connectivity improve in India, it will remove bottlenecks that are hindering long-term economic growth and bring India's potential growth path even higher," Phua said.