GST: India’s big tax reform paying off, but budget hole fears stay

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One year after India introduced a consumption tax, the results have been mixed. Hailed as one of the biggest reforms by Prime Minister Narendra Modi, the goods-and-services levy has helped increase tax collections in a country where compliance is historically low. 

While monthly receipts have picked up after a chaotic rollout, they are still not strong enough to meet the government’s annual tax target. GST brought in an average 975.4 billion rupees ($14.2 billion) a month in revenue, government data reported in the three months to June show, compared with a target of nearly 1.1 trillion rupees.

India needs the revenue to keep its budget deficit in check as Modi prepares to ramp up spending on welfare programs from health to farming before general elections next year. The government has already widened its deficit goal for the current fiscal year to 3.3 percent of gross domestic product from 3 percent, putting pressure on bond yields.

The budget gap may reach 3.5 percent of GDP this year as GST revenue trails, Suvodeep Rakshit and Upasna Bhardwaj, analysts at Mumbai-based Kotak Mahindra Bank, said in a note on Monday.