The introduction of the Goods and Services Tax (GST) in India has significantly reshaped how taxes are managed between the central and state governments. According to Bibek Debroy, the chairman of the Economic Advisory Council to the Prime Minister (EAC-PM), the consistent increase in GST revenue serves as a strong indicator of the success of this reform.
In a paper titled ‘How the Pennies Drop: What GST revenue data tells us and What it doesn’t’, Debroy also suggests creating a GST Rate Index. This index would allow us to monitor how tax rates change relative to one another and gain insights into how it influences tax collections.
The arrival of the Goods and Services Tax (GST) in India back in 2017 brought about significant changes not just in the economy but also in how money is managed between the central and state governments.
One of the standout features of this transformation has been the consistent increase in GST revenue. This is like a reliable gauge that tells us just how well this reform is working,” he explained.
Debroy introduced an innovative approach to calculate the GST collection rate, using information available to the public. This method has potential uses in predicting revenue, analyzing trends over time and across regions, and shaping policies.
He proposed creating a GST Rate Index, which serves as an indicator of the effective rate. This index is derived from easily accessible GST rate data found in the public domain.
When GST was introduced, both the central and state governments combined their authority in areas like policy-making, setting rates, and creating laws/rules for this new tax. This sharing of power is sometimes seen as a limitation for states, but it also acts as a constraint for the central government.
Debroy noted that the impact of GST has been measured in various ways, including improvements in logistics, increased trade between states, and simplified compliance through uniform processes and procedures.
However, the most significant measure of the effectiveness of any tax reform is the revenue it generates.
Over the past six years since its launch, GST revenue collections have shown steady growth. This applies to both domestic supplies and integrated GST (IGST) paid on imports, with a particularly noticeable uptick from 2020-21 onwards.
The revenue collected from domestic supplies under GST increased from Rs 8.77 crore in 2018-19 to Rs 12.94 crore in 2022-23. Similarly, IGST revenue rose from Rs 11.77 crore in 2018-19 to Rs 18.1 crore in 2022-23.
Debroy highlighted that while the speed of tax collections has slowed after the introduction of GST, the overall buoyancy of collections has been notably higher in the GST era, despite a consistent decrease in tax rates.
Regarding the increased formalization of the economy under GST, Debroy mentioned that the total number of registered GST assesses in June 2023 was 218% higher, totaling 1,40,91,249, compared to 44,35,653 in 2017.
He also pointed out that India’s indirect tax rates are among the lowest internationally.Among the 37 countries in the OECD, India boasts a lower average tax rate than all but four.
