A Practical Strategy: Bridging GST Revenue Gaps without Quick Rate Hikes

T Guwahati

The implementation of the Goods and Services Tax (GST) at rates slightly below the measured revenue neutral rate (RNR) has raised concerns among experts and financial bodies. While the primary plan to restore the RNR is in place to protect state governments from losing State-Goods and Services Tax (SGST) revenue, a significant increase in rates needs careful reassessment.

Two key reasons necessitate a cautious approach:

1. Complex Relationship Between Rates and Revenue: Revenue growth is not solely determined by GST rates; there exists a complex relationship. Beyond a certain threshold, higher rates can lead to decreased consumption and counterproductive outcomes.

2. Dynamic Consumption Market: The consumption market is highly dynamic, and the RNR is influenced by fluctuations in consumption patterns. Increasing rates may not be a sustainable solution.

Focus on Compliance and Base Expansion: Globally, enhancing compliance and expanding the tax base have proven to be effective strategies for increasing revenue without resorting to rate hikes. GST, as a destination-based tax on consumption, aims to limit taxation to value addition at each stage.

Acceleration of GST Revenues: Recent years have witnessed improved compliance, leading to an acceleration of GST revenues. However, the SGST-to-state GSDP ratio remains lower than pre-GST levels.

Addressing Structural Barriers: Instead of relying solely on rate hikes, addressing structural barriers within the GST system and preventing revenue leakage should be a priority. Increased indirect tax collection may not be feasible in a challenging economic environment.

In conclusion, a more nuanced approach involving compliance improvement, base expansion, and addressing structural issues can be a more sustainable way to bridge GST revenue gaps, rather than quick rate hikes that may have adverse effects on consumption and overall economic growth.

Note: This article provides insights into the challenges and considerations related to GST revenue generation and the need for a balanced approach