The newly-implemented goods and services tax (GST) will support productivity and boost the long-term growth prospects but is unlikely to increase tax revenue in the short-term, says a report by Fitch Ratings. Claimed to be usher in a single tax regime, the GST rolled out on July 1 has a four-slap tax structure for different goods, ranging from 0-28 per cent. “GST will unify the indirect tax system and remove domestic barriers to trade, which should support productivity gains and GDP growth over the long term,” Fitch said, adding it is “unlikely to increase revenue in the short term.” It is, however, likely to boost revenue indirectly over the long-term, as it supports GDP growth and encourages tax compliance. Unlike it rival Moody’s, Fitch is silent on the impact of the new tax regime on the sovereign ratings of the country, which the agency has pegged at just above the junk grade at BBB- with a positive outlook. Moody’s had last Sunday said the new tax regime would boost GDP and would be positive for the sovereign ratings.
A benefit of value-added taxes like GST is that retailers are required to show compliance right along the supply chain to claim refunds, it said, adding large companies will now have an incentive to pressurise their smaller suppliers into tax compliance. The new electronic filing system is also likely to lead to more tax reporting. “Moreover, the tax base will be broadened, as only SMEs with sales up to Rs 2 lakh will now be exempt from paying GST, down from Rs 1.5 crore earlier.” Small informal retailers, which account for over 90 percent of retail sales, should 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. “This could accelerate the shift toward organised retail.”
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The report, however, said there are significant short-term risks involved in the GST implementation, and emphasised that the late changes to the GST laws and the disruptive roll-out of demonetisation. “High compliance costs for businesses and administrative difficulties have been problems in some emerging economies that have introduced value-added taxes, particularly those that had complex systems, under-resourced bureaucracies and short lead-in periods,” it said. The agency said GST will overhaul the way businesses operate, affecting their financial reporting, tax accounting, supply-chain management and technology requirements.
“The large bureaucracy is likely to be tested by the new system, with further potential implications for businesses,” it added. “Over the medium-term, we expect GST will contribute to productivity gains and higher GDP growth by improving the ease of doing business, unifying the national market and enhancing India’s attractiveness as a foreign investment destination,” Moody’s had said, adding GST will also support higher government revenue generation through improved tax compliance and administration.