GST propels higher growth in long run: Fitch, Moody’s 

New Delhi: Global rating agencies Moody’s Investors Service and Fitch Ratings have welcomed the passage of long-awaited Constitutional Amendment Bill for Goods and Services Tax (GST) saying that it would help economy growth and remove barriers in the trade.

Moody’s Investors Service today said the GST implementation will be positive for the country’s economic growth without any significant impact on inflation, but cautioned that other controversial reforms may witness a slower progress. Fitch Ratings said GST is an important reform that will remove barriers in trade, improve economic efficiency and lead to higher growth in the long run.

Firth Ratings said: “It remains to be seen whether the introduction of a national GST will lead to a higher intake of tax revenue. This will depend on a number of factors, such as the level at which the tax rate will be set.”

The rate still needs to be decided by the GST Council, which includes representatives from the Ministry of Finance and each state government. The rating agency also noted that the introduction of national GST, though positive from a longer-term economic perspective, should not have a substantive effect on the fiscal account in the short term. It also expects the debt to reach 69.4 per cent of GDP and the deficit to fall to 6.8 per cent in the current fiscal. The single unified value added tax system is expected to turn the country into world’s biggest single market, opined Fitch Ratings.

It remains to be seen whether the introduction of a national GST will lead to a higher intake of tax revenue. This will depend on a number of factors, such as the level at which the tax rate will be set.

Marie Diron, Senior VP Sovereign (Risk Group) at Moody’s Investors Service, said: “The passage of GST is in line with an assessment that progress in reforms will be gradual and dependent on ad-hoc political support. In other reform areas, where and when there is some majority view in support of specific policies, reform measures may be implemented. More controversial reform areas are likely to see slower progress.”

The GST reform has taken many years, under this and previous administrations and it has been possible as the political composition of the Upper House has shifted slightly, Moody’s said.
The rating agency said the short-term credit implications of GST for the sovereign will be limited, but in medium term it is likely to have a positive impact on the economy and government revenues. Over time, this should be positive for growth. Moreover, the simplification of the tax system will reduce corporates’ and the government’s tax administration costs. This should improve compliance and raise government revenues. Moody’s expects GST implementation by states will take place in the next few months.