Goods & services tax (GST) as a share of gross domestic products (GDP) has maintained parity with personal income tax, a report by Finance Ministry shows. Economists attribute this to consumption demand, compliance, and some impact of inflation. However, another view is that this trend is not leading to an overall regressive taxation regime.
“GST has become the largest contributor to indirect taxes, ever since its implementation in FY 2017-18, “ a Finance Ministry report prepared to meet the obligations of the Government under the Fiscal Responsibility and Budget Management Act, 2003, said. It showed that the share of GST in GDP went up to 3.1 per cent in FY23 from 2.8 per cent in FY21, During the same period share of personal income tax rose from 2.5 to 3.1 per cent of GDP Apart from GST, indirect taxes also include Custom Duty and Central Excise Duty (levied mainly on petrol and diesel). At the same time, direct taxes comprise corporate income tax (CIT) and personal income tax (PIT).
While direct taxes are considered progressive as people’s tax incidence rises with a rise in income, indirect taxes are called regressive as these are levied according to the category of goods (merit vs demerit) or value of goods and not the basis of income of the consumer. According to a budget document, the Direct and Indirect Tax receipts are individually estimated to grow at 10.5 per cent and 10.4 per cent, respectively. The overall tax (GTR) buoyancy is estimated at 0.99. As the tax collection from GST stabilises, it is likely to give a boost to the Indirect tax collection with an estimated GST buoyancy of 1.14 in the ensuing year. In BE 2023-24, it is estimated that the direct and indirect taxes contribute 54.4 per cent and 45.6 per cent, respectively, to Gross Tax Revenue (GTR).
Professor M K Agrawal of Economics Department, Lucknow University said: “This sustained increase in GST is the cumulative impact of transparent and digital tax administration, rapid economic growth, and a boost in consumption expenditure, particularly at the lower income level in the economy.” Echoing the same sentiment, Professor Anup Kumar Mishra, Head of the Department of Economics at DAV PG College, BHU, felt the increase in GST has been relatively gradual, which has helped to mitigate some of the negative consequences. The increase in GST could be due to several factors including, Increased compliance, higher inflation, stronger economy, etc. “However, the increase in GST could also have some negative consequences. For example, it could lead to higher prices for goods and services, which could impact the purchasing power of consumers. It is important to monitor the impact of the increase on inflation and businesses, in order to ensure that it does not have any negative consequences,” Mishra suggested.
Meanwhile, the rise of GST’s share in GDP may not be called regressive. Devendra Kumar Pant, Chief Economist with India Ratings & Research, said that a broad look at direct and indirect tax collections suggests that direct tax collections are higher than indirect collections. It is not regressive. “GST on most of the food products is either zero or taxed at low rates, and people from the lower income strata are protected However, if indirect tax collections overtake direct tax collections, it will be regressive,” he said.