GST as share of GDP on a par with personal income tax

August 14, 2023
Posted by: OptimizeIAS Team
Category: DPN Topics

GST as share of GDP on a par with personal income tax

Subject :Economy

Section: Fiscal Policy

In News: Goods & services tax (GST) as a share of gross domestic products (GDP) at the same level as personal income tax share, a report by Finance Ministry shows.

Key Points:

GST has become the largest contributor to indirect taxes, ever since its implementation in FY 2017-18.
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.
This rise in GST is attributed 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.
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).
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).
The 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. Stronger growth and high inflation has also contributed to the GST numbers.
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.
- GST on most of the food products is either zero or taxed at low rates, so the people from the lower income strata are protected. But if the indirect tax collections overtake direct tax collections.

Progressive and Regressive tax

Progressive tax refers to a tax system in which the tax rate increases as the taxable income of an individual or entity rises. This approach aims to distribute the tax burden more equitably by imposing higher tax rates on those with higher incomes, reflecting a principle of greater ability to pay.
In contrast, regressive tax is a system where the tax rate decreases as income increases. This can lead to a relatively higher tax burden on lower-income individuals, as a larger portion of their income goes towards taxes, potentially exacerbating income inequality.
Direct taxes are considered progressive as people’s tax incidence rises with a rise in income, while 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.
Since lower-income individuals tend to spend a larger portion of their income on basic necessities like food, clothing, and housing, a higher percentage of their income goes towards paying these taxes.
Hence countries strive to strike a balance between direct and indirect taxes to ensure that the tax burden is distributed more equitably and takes into consideration the ability to pay.