Reforms such as Goods and Services Tax (GST) and demonetisation will improve tax collection and broaden the tax base in India overtime, Moody’s Investors Service said on Thursday. In a report on broadening tax base in Asia Pacific countries, Moody’s said although there are uncertainties surrounding GST implementation and compliance, including the timely provision of input tax credit refunds, India’s strong economic growth and stable fiscal regime should support the effectiveness of ongoing tax reforms in yielding gains.
The long-awaited, unfied GST on July 1 last year replaced a dual taxation model which involved multiple levels of central and state governments imposing taxes throughout the value chain. The ‘one nation, one tax’ was in making for over 17 years. “The implementation of a GST came alongside a range of measures, including at temporary tax amnesty scheme, demonetization, and measures to strengthen tax administration and the ease of doing business, which will contribute to improving tax collection and broadening the government’s tax base over time,” Moody’s said in the report.
The government, it said, in the Budget for 2018-19 introduced several additional measures to broaden India’s tax base. “These included a new long-term capital-gains tax of 10 per cent on equity investment profits exceeding Rs 1 lakh after a minimum holding period of one year, and a reduction in corporate taxes to 25 per cent from 30 per cent for companies with revenue of Rs 250 crore or below,” it said. “The taxation structure for larger companies remains generally unchanged.”
Overall, the government anticipates gross tax revenue of 12.1 per cent of GDP for 2018-19, an increase from 11.2 per cent of GDP as of 2017-18. “While there are ongoing uncertainties surrounding GST implementation and compliance, including the timely provision of input tax credit refunds and iterative changes to tax rates resulting in potential revenue losses, India’s strong economic growth, slower but maintained fiscal consolidation, and formal adoption of a central government debt-to-GDP target of 40 per cent are additional measures that should support the effectiveness of ongoing tax reforms in yielding gains in fiscal strength over the medium term,” Moody’s said.
In the report, the credit rating agency said tax reforms are likely to expand revenue base in fast growing economies like India but they will be most effective when accompanied by lowering of fiscal deficit and effective management of expenditure. It said most sovereigns have embarked on tax administration and compliance reforms, especially through the centralisation of multiple agencies and increased usage of technology.
“We believe that tax administration and compliance is likely to be most effective in the Philippines, India, Indonesia and Thailand,” Moody’s said in a statement. Tax reforms are most likely to expand revenue bases in fast-growing economies with strengthening expenditure and debt management. These include the Philippines, India, Indonesia and Thailand, it said.
“For many sovereigns, measures to broaden the tax base are unlikely to boost fiscal strength unless accompanied by enhanced tax administration and measures that effectively manage expenditure growth,” Moody’s VP and Senior Credit Officer William Foster said. The credit profiles of fast growing economies that are undertaking fiscal consolidation and which have relatively strong or strengthening institutions – such as the Philippines, India and Indonesia – are likely to garner the most support from ongoing tax reforms in the medium term, Moody’s said.
On indirect revenue mobilisation, India and Sri Lanka have both recently streamlined and levied their value-added tax (VAT) or goods and services tax (GST) regimes. For India, this was the result of replacing a system of taxation at multiple points of production with taxation at a sole point. “Overall, indirect revenue mobilisation is likely to be most effective in the Philippines, India and Sri Lanka, as these economies benefit from ongoing reforms,” Moody’s said.