How Interim Budget initiates reforms in GST Regime ?
India is one of the few countries in the world where tax-to-GDP ratio has grown after the pandemic and this growth in tax collection has aided the government to reduce fiscal deficit. At the same time, experts expect the government to unleash further reforms in direct tax and GST to maintain the buoyancy in tax collection in the coming years as well.
Soumya Kanti Ghosh, Group Chief Economic Advisor, Economic Research Department, State Bank of India, said in a statement, “the interim budget estimates fiscal deficit for next financial year to decline to 5.1%, which we feel can be still lower by 10 basis points when the full year budget is presented later in the year. We expect fiscal deficit in FY25 to be 5.0%, instead of the estimated 5.1% and for the current year, the fiscal deficit may be 5.7% against the revised estimate of 5.8%. Traditionally, in the full year budgets of 2014 and 2019, the government revised down the fiscal deficit by around 10 basis points from their original estimates in the interim budget. The decline in fiscal deficit may be aided by strong tax revenue collections. The government has estimated tax buoyance of 1.1 times for FY25, which is conservative, given that we have had 1.5 times tax buoyancy in the recent past”.
Ghosh further pointed out that the tax to GDP ratio has grown to a 16-year high of 11.6% this year, which may grow further to 12.1% if the tax collection is buoyant. “There is strong tax buoyancy in GST, which is a testimony to the smooth functioning of this indirect tax system.”
The government may reform the GST regime to compensate for the loss of revenue from the discontinuation of the compensation cess from FY26, he said. “Currently, the amount raised from GST compensation cess is being used to repay the Rs. 2.7 lakh crore debt raised from the RBI to support state governments. This cess will be discontinued from FY26, which may prompt the government to reform the GST system to compensate for this revenue,” he added.
M.S. Mani, Partner-GST, Deloitte India informed that the government may introduce the next wave of GST reform in the later part of next financial year. “In the interim budget, the government has not made major amendments in GST, except the provision on input service distributor and the new section 122A imposing penalty for non-registration of machineries in some regulated sectors. In future, the government may rationalize GST rates by reducing multiplicity of slabs, bringing petroleum products under GST regime gradually starting with Natural gas, aviation turbine fuel and then petrol and diesel.
Rupa Naik, Executive Director, MVIRDC World Trade Center Mumbai mentioned that the Finance Minister has delivered a development-oriented budget without resorting to populist schemes. Within the available resources, the Minister tried to support all sections of the society, whether it is farmers, women, youth, start-ups, MSMEs, small taxpayers and large corporates, she added. Ms. Naik raised hope that the budget measures will promote investment in sustainable manufacturing, green energy, real estate and infrastructure sectors.
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