Taxation & Revenue Mobilisation: The GST share in total receipts has declined from 18 paise to 15 paise per rupee between FY 2024-25 and FY 2026-27. What factors explain this and what are its implications for indirect tax buoyancy?

Question

PocketIAS · Accepted Answer

Introduction:

The fall in GST’s share from 18 paise to 15 paise per rupee between FY25 and FY27 reflects compositional changes in revenue rather than an absolute collapse in GST collections.

Body:

Several factors explain this trend. First, strong growth in direct taxes—especially personal income tax driven by formalisation, higher compliance, and buoyant incomes—has outpaced GST growth, reducing its relative share. Second, consumption demand has been uneven, with rural distress and inflationary pressures dampening mass consumption, thereby limiting GST buoyancy. Third, rate rationalisation and corrections in inverted duty structures have moderated effective tax rates in some sectors. Fourth, compliance gains from measures like e-invoicing may have plateaued after initial high growth phases. Finally, the shift in fiscal strategy toward capital expenditure-led growth, which has a longer gestation impact on consumption, may have temporarily constrained GST expansion.

The implications are significant. A declining GST share raises concerns about the stability of indirect tax buoyancy, which is closely tied to consumption cycles. It may constrain fiscal space for both the Centre and states, given GST’s role in cooperative federalism and revenue sharing. It also highlights structural issues in demand recovery and the limits of relying on indirect taxes for sustained revenue growth. However, it simultaneously reflects a healthier tilt toward progressive direct taxation.

Conclusion:

Reviving GST buoyancy will require strengthening consumption demand, rationalising rates, improving compliance depth, and stabilising the GST architecture—ensuring it remains a robust pillar of India’s tax system.

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