The growth of indirect taxes has slowed under GST – but the government isn’t worried

The Economic Survey – the government’s annual report of the state of the economy, which was tabled in Parliament on Tuesday – has shown that the growth rate of indirect taxes in the new Goods and Services Tax regime has fallen compared to the previous system of state and central indirect taxes.

However, the government is not too concerned about it because there has been a rise in tax buoyancy, a metric that tracks growth of tax compared to the gross domestic product.

Fall in GST collection

The Economic Survey said that the aggregate state and central taxes subsumed in the Goods and Services Tax had a compound annual growth rate of 11.53% between financial years 2012-’13 and 2016-’17, which was before the Goods and Services Tax regime was put in place. The “compound annual growth rate” refers to the average annual growth rate over the specified period longer than a year.

In contrast, the Goods and Services Tax collection rate has grown at a compound annual growth rate of 10.9% when the tax on imports is taken into consideration between the financial years 2018-’19 and 2022-’23 (until December 2022). This figure falls further to 10.2% when only the domestic GST is considered and imports excluded.

Rise in tax buoyancy

However, the Economic Survey justifies this fall by citing India’s slowing gross domestic product growth rate during the Goods and Services Tax years. As a result, it points out that tax buoyancy has increased under the Goods and Services Tax regime.

A tax is considered buoyant when a change of one percent in national income or the gross domestic product generates more than one percent change in tax collection. Therefore, a tax buoyancy of over one is considered good.

“The evidence so far suggests that GST is indeed showing a higher buoyancy than the pre-GST system,” the survey, written under the guidance of Chief Economic Advisor V Anantha Nageswaran, argued. “This augurs well for future resource mobilisation in the economy.”

However, data presented in the Economic Survey suggests that this growth in tax buoyancy has been marginal.

Between financial years 2012-’13 and 2016-’17, before the implementation of the Goods and Services Tax regime, the tax buoyancy for state and central indirect taxes was 0.9988 or “could be taken as one for practical purposes” as per data from the Economic Survey.

Under the new GST regime, this number has grown to 1.1299 when imports are included as part of the Goods and Services Tax collections. However, when GST only on domestic supplies is considered, the number falls to 1.0603 – just marginally more than the pre-GST taxation regime.

Experts have pointed out that rising Goods and Services Tax collections have been driven by a surge in imports. As T Venkateswaran, partner with Price Waterhouse & Co., told BQ Prime this is “not healthy”.