New Delhi, Sep 10 Goods and Services tax (GST) reforms are expected to boost domestic consumption without disrupting the trend of fiscal consolidation, a new report has said.
The Centre may reduce government spending in the next two quarters to maintain fiscal consolidation trends, according to a report from ratings agency Moody’s.
The government estimates a net foregone revenue of Rs 48,000 crore ($5.4 billion) for this year, based on FY24 data calculations. The GST reform may impact the government's efforts to reduce debt, the report said.
"India continues to have the weakest debt affordability among investment-grade sovereigns, with interest payments amounting to about 23 per cent of general government revenue in fiscal 2024-25," the note said.
The rating agency reported that the revenue loss from the rate adjustment is expected to exceed government estimates, with a more pronounced strain in coming years.
"Given the government's use of revenue-eroding measures to support growth over the past year, we do not expect significant revenue-enhancing measures over the remainder of its term. This, in turn, pre-empts material gains in debt reduction or improvements in debt affordability," Moody's highlighted.
The decrease in effective GST rates, however, could enhance private consumption and support economic growth, it said.
The GST reform serves as additional fiscal policy support for households, complementing the higher income tax thresholds introduced in February, which exempted many middle-income households from paying income taxes and lowered income tax payments for others.
Moody's noted that both measures aim to boost household consumption, which represents approximately 61 per cent of GDP.
The GST Council last week revised the tax structure to a two-slab rate of 5 per cent and 18 per cent, introducing a new 40 per cent GST rate on 'sin goods', effective September 22.
A report from SBI Research had earlier said that the overall headline revenue loss to the government is likely to be contained with a concomitant shift in sin goods from 28 per cent slab to 40 per cent slab.
The GST 2.0 regime, while also involving an average revenue loss of Rs 85,000 crore, is estimated to have boosted consumption by Rs 1.98 lakh crore, it noted.
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