Although the lower GST rates will boost consumption, the increase in tax revenue from this is unlikely to offset the hit to tax revenues due to the cuts, Moody’s Ratings said in a report.
However, it did add that revenue from the higher 40% rate should mitigate some of the impact. Overall, Moody’s Ratings also said that the revenue foregone is likely to be higher than the ₹48,000 crore the government had predicted.
“Although the lower rates will support consumption, we do not expect marginal additions to tax revenue from more robust domestic activity to offset the strain on tax revenue,” Moody’s Ratings said in its report.
However, some mitigation will likely come from additional revenue generated from the introduction of the higher 40% tax rate, as well as the simplification of GST governance the GST Council announced, it added.
The government has estimated the net revenue foregone this year— balancing the reduction from the rate cuts and the addition from the 40% slab items— to be ₹48,000 crore.
“Given the expansion of the economy over the past two years, which implies a correspondingly larger volume of goods subject to GST, foregone revenue is likely to be higher than government estimates,” the report said.
This strain, it added, “will be even more pronounced” in the coming years as the new tax structure would be effective over the course of a full year, rather than the remaining six months of the current financial year.
“Combined with tax measures announced in the fiscal 2025-26 budget in February, particularly the increase in the personal-income threshold for paying income taxes, the consolidated GST tiers will erode revenue buoyancy,” Moody’s Ratings noted.
Given that the government has chosen ‘revenue-eroding’ measures to support growth over the past year, Moody’s said it does not expect significant revenue enhancing measures over the remainder of this government’s term.
“This, in turn, preempts material gains in debt reduction or improvements in debt affordability,” it noted. “Reflecting its high level of general government debt, India continues to have the weakest debt affordability among investment-grade sovereigns, with interest payments amounting to about 23% of general government revenue in fiscal 2024-25.”
In contrast, the median for other Baa-rated countries was around 8.3%, it said.
