Introduction:

The Goods and Services Tax (GST) implementation rate structure, situated slightly below the revenue neutral rate (RNR), has prompted concerns within the financial landscape. Both the Reserve Bank of India and the 15th Finance Commission express apprehensions regarding the impact of the measured rate on revenue, emphasizing the need for a strategic response. While the initial focus is on promptly restoring the RNR to protect State-Goods and Services Tax (SGST) revenue, a thorough evaluation of the strategy involving significant rate hikes is essential.

Factors Beyond GST Rates:

The intricate relationship between revenue growth, GST rates, and their impact on economic agents extends beyond simple cause and effect. Nuanced by consumption-demand dynamics and the price sensitivity of demand, these factors contribute to a fluctuating revenue neutral rate. Sanjeev Sanyal, a member of the Prime Minister’s Economic Advisory Council, stresses the objective of generating greater tax income while minimizing the impact on the economy.

Consumption Market Dynamics:

In the dynamic landscape of a consumption-driven market, where demand is sensitive to pricing, a strategic focus on compliance improvement and the expansion of the tax base is paramount. Relying solely on rate hikes poses the risk of diminishing overall demand, especially in situations where consumption is leveraged.

Global Insights on Revenue Increase:

Internationally, the efficacy of revenue increase lies in enhancing compliance and broadening the tax base rather than merely adjusting tax rates. GST, operating as a destination-based tax on consumption, seeks to confine taxation to the value added at each stage. The anticipated outcome is a gradual reduction in tax rates as incremental value creation occurs.

Challenges in GST Revenues:

Despite advancements in compliance in a rapidly formalizing economy, the SGST to state GSDP ratio remains below pre-GST levels. Challenges within the GST framework and the lingering impact of the pandemic contribute to this scenario. The plateauing of GST revenue growth presents a formidable challenge in bridging the revenue gap in the struggling economy.

Moving Forward:

Critical to progress is the meticulous addressing of structural barriers within GST and the prevention of revenue leakage. With expectations of increased GST indirect tax collection being unrealistic in a challenging economic landscape, a strategic approach that extends beyond mere rate hikes is imperative. This involves a concentrated effort on compliance improvement and expanding the tax base to ensure sustainable and robust revenue growth.

Conclusion:

As GST revenue challenges persist, the need for a thoughtful strategy becomes imperative. By addressing structural barriers, enhancing compliance, and considering the dynamic nature of the consumption market, the GST system can evolve to effectively meet the economic challenges at hand.