GST won’t have major impact on inflation, says Moody’s
Economy and government revenue will benefit in the medium term if the tax rates remain within the revenue neutral band, according to Moody's Investors Service
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New Delhi: The goods and services tax (GST) will have no major impact on inflation, if the tax rates are within the revenue neutral band, Moody’s Investors Service said on Thursday, a day after the Rajya Sabha passed the 122nd constitution amendment bill.
A report of the Central government-constituted committee, under chief economic advisor Arvind Subramanian, had calculated the revenue neutral rate under GST at 15%-15.5% and the consequent standard rate at 17%-19%.
A revenue neutral rate is a tax rate wherein the states and the Centre do not suffer any revenue losses from moving to a new tax regime.
Also Read: GST bill passed: Here are the winners and losers
Moody’s Investors Service added that in the short term, the implications on India’s credit rating will be limited, though it will have a positive impact on the economy and the government revenue in the medium term.
“The short-term credit implications of GST for the sovereign will be limited. First, effective implementation will take some time since further legislation is needed at the state level and the changes in IT systems to process GST will take some more time. Second, GST is intended to be revenue neutral. As a result, it will have no direct impact on the budget of the Government of India," said Marie Diron, senior vice-president, Sovereign Risk Group, Moody’s Investors Service.
In the medium term, GST will remove one hurdle to the smooth movement of goods and services and focus corporates’ location decisions on operational considerations rather than tax regimes, Diron said. “Over time, this should be positive for growth. Moreover, the simplification of the tax system that the GST introduction will bring about will reduce corporates’ and the government’s tax administration costs. This should improve compliance and raise government revenues," Diron added.
However, the agency warned that GST could raise inflation if reduction in costs from the removal of various taxes that GST will replace are not fully passed on.
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