GST rate cut ahead of polls good for consumers, but is it good for govt revenue; Experts divided

The recent cut in GST rate in nearly 100 items, is seen as a positive move when it comes to consumers. The GST Council has reduced most of the items under the highest GST tax slab of 28% and shifted them into the lower tax slabs namely 18%, 12%, 5% and even nil. The move is seen to be a helping hand for both industries and consumers, as now the tax levied under products will become lesser. Many sectors like FMCG, auto, electronics, consumer durables and paint have shown positive reactions over the latest cut in GST rate which was done in 28th meeting of the council. However, the move is also seen as a good strategy with the upcoming elections, but has been explained a negative for government revenue and also India’s fiscal position. 

In a latest to explain would rating agency Moody’s Investor Services, as it believes the recent GST rate cuts will weigh on government's revenue collection and is ‘credit negative' as it will put pressure on efforts of fiscal consolidation.

Moody’s estimates revenue loss from the most recent tax cuts to be about 0.04% -0.08% of GDP annually.

In a statement, Moody’s said, “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.”

Further, the agency explained that 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 fiscal year. 

Therefore, Moody’s expect a revenue loss between Rs 8,000 - Rs 10,000 crore, however, the government is confident that the GST rate cut would lead to more compliance and rise in demand. This leads to revenue buoyancy which would offset the loss. 

Moody’s is not alone in believing the GST rate cut will put pressure on government revenue and fiscal position, but recently IDFC Securities also mentioned similar points. 

IDFC Securities highlighted that it is a good move for consumers and manufacturing sector. 

Anish Damani and Bhawana Chhabra analysts at IDFC said, “We also expect a boost to consumption demand in the economy, propelled by a fall in prices across products. Key changes announced were a) a cut in consumption goods tax rate across products, b) cut in  rurally/socially-focused services tax rate and c) ease in compliance procedure for small players.” 

The duo added, “Consequently, we see further support for growth in consumer goods IIP series, which has been holding strong for last few months on receding consumption imports with domestic manufacturing fulfilling the demand.” 

According to them, the GST Council has announced service tax exemption mostly in rural and social sectors, as this is a pre-election year.

Talking about fiscal position, IDFC said, “We believe while this announcement alone would not put much pressure on the fiscal math, but clubbed with MSP hikes, difficulty in achieving disinvestment target could mean a small fiscal slippage at end of the year. However, its too early to draw a trend on this front.”

Also, IDFC reiterated, “we expect the tax rate reduction to fuel consumption demand and compliance, which would aid tax collections and growth with a lag (probably 9- 12 months). “