Uncovering the Truth: Debunking Four Myths About GST Cuts

By T M Thomas Issac

The recent reductions in GST rates appear to be a populist strategy ahead of the upcoming state elections. The buzz surrounding the expected benefits for consumers and the economy is largely overhyped and often misleading.

Myth 1: India’s GST Rates Are Excessively High and Hinder Growth

In actuality, the weighted average GST rate was merely 15.3% in 2017, significantly lower than the combined burden of multiple indirect taxes in India. Following successive rate cuts, this average has now dropped to 9.8%, marking it as one of the lowest indirect tax rates worldwide. In contrast, European nations maintain VAT rates starting at 15%, with the EU-27 average around 21%.

Countries within BRICS, like Brazil and Russia, have tax averages of 17% and 20%, respectively. In stark comparison, India’s tax-to-GDP ratio remains lower than many developed nations, with the average being merely 11.7%. This limited ratio places India at the bottom of global development indices, despite being one of the fastest-growing economies.

Myth 2: The Multiplicity of GST Rates Complicates the Tax System

A look back at the complex array of taxes prior to GST reveals considerable simplification since its implementation. However, discussions around further simplification should also consider the equity principle in taxation.

Reports indicate that in 2020-21, approximately 65% of GST revenue came from the bottom half of the income spectrum, with just 3% from the wealthiest 10%. The recent reductions predominantly benefited goods used by the affluent, compromising the progressivity of the tax system.

Myth 3: Reduced GST Will Lead to Lower Consumer Prices

Historically, when average GST rates fell from 15.3% to 12.2% in 2018, consumers did not see significant benefits. A study in Kerala demonstrated that major corporations were the real winners as they did not pass on the tax benefits to consumers. This prompted the establishment of the National Anti-Profiteering Authority (NAA), though it has since been integrated into the Competition Commission without much success.

In an ideal market, tax reductions would benefit consumers, but the reality of an oligopolistic market structure often means that corporate interests prevail over consumer pricing.

Myth 4: Lower Consumer Prices Will Stimulate Demand

This notion has been vigorously promoted, suggesting that tax reductions and budget cuts could boost consumption by as much as 1.6% of GDP. However, this is based on the assumption that other economic factors remain constant, which seems overly optimistic given current economic challenges, including inflation and fluctuating currency values.

There is little evidence to support the idea that reducing GST will enhance consumer purchasing power enough to offset initial revenue losses. Expectations set during Independence Day discussions on GST simplification may ultimately burden state revenues, exacerbating the existing shortfall as states see little growth compared to what was initially promised.

The assurance that GST revenue would grow by 14% annually has proven unrealistic, with actual growth averaging just over 11% in recent years. As the compensation period for states has expired, the implications of these cuts remain a pressing concern. How do you think these GST changes will affect consumers and the economy moving forward?