GST to boost India’s GDP growth in long-term but poses short-term risks: Fitch

05 Jul 2017 Evaluate

Global ratings agency, Fitch ratings in its latest report has said that the newly launched one nation one tax, namely Goods and Services Tax (GST) is likely to remove domestic trade barriers and will boost revenue indirectly over the long term as it supports Gross Domestic Product (GDP) growth and encourages tax compliance. But it also said that it poses significant short-term risks, emphasised by the late changes to the bill and the disruptive roll-out of demonetization. Fitch has said that the landmark tax reform that came into effect from July 1, 2017, is relatively complex, including multiple tax rates for different goods - ranging from 0-28%, or higher where ‘sin taxes’ are applied - and requires frequent filing in all states in which a company operate. The ratings agency however said that it is ‘far simpler’ than the previous system, under which each state set its own sales taxes - in addition to the central government - and imposed border taxes on goods entering the state.

The US-based credit rating agency also said that the unified national system should offer significant opportunities for productivity and added that it will become much quicker and less costly to move goods across the country now that trucks will not be held up at checkpoints at state borders. It added that smoother logistics should reduce retailers’ need for working capital and allow them to operate centralised warehouses, rather than in every state. Supply chains could extend, encouraging specialisation, now that there is less incentive to source goods within state border. Tax filing may also become less time-consuming as a result of the new electronic system. Large companies will now have an incentive to pressure smaller suppliers into compliance.

As per the report, the new electronic filing system is also likely to lead to more tax reporting. Moreover, the tax base will be broadened, as SMEs with sales of only Rs 20 lakh will now be exempt from paying GST, down from Rs 1.5 crore. Small informal retailers also find it harder to understate their sales or to avoid filing tax returns altogether in a system where transactions are tracked throughout the supply chain, as a result this could accelerate the shift toward organised retail. It added that the informal sector is very large, accounting for over 20% of GDP and 80% of employment, and is largely untaxed. This is one of the reasons why government revenue is low, at just 21.4% of GDP in 2016, compared with a median of 29.9% for ‘BBB’ range sovereigns.

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GST to boost India’s GDP growth in long-term but poses short-term risks: Fitch

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