Is There a ‘Money Machine’ Tax?

This analysis based on more than four decades of time series data on sales tax/value added tax/goods and services tax in India does not reveal any nonpareil revenue potential of VAT or the VAT-based GST system. Though the GST revenue has started growing at a faster pace since mid-2020, it is yet to meet its target. The role of tax administration, as in any other case, remains paramount in stabilising the GST regime.

India’s value added tax (VAT)-based goods and services tax (GST) system came into existence in two phases. Indian states first adopted the VAT-based sales tax system (state VAT, hereafter) around 2005. It continued till the introduction of nationwide GST in 2017. The dual indirect tax architecture in India now consists of GST and non-GST. The latter includes only customs and excise duties on POL (petroleum, oil, and lubricants) and GST has subsumed all other indirect taxes of the union and the states. As GST completed its five-year journey in 2022, certain developments are worth reckoning at this juncture. First, GST (Compensation to States) Act, 2017 and GST (Compensation to States) Amendment Act, 2018 had provided for the protection of revenue lost by states, to the tune of 14% annual increase on the 2015–16 revenue base, for a period of five years (2017–18 to 2021–22). The compensation cess, levied for the purpose, was adequate for the initial two years. However, it has fallen short in the third year due to the pandemic. By 2021, the consolidated gross fiscal deficit (GFD) of the states has touched a historical high. Under such circumstances, the union government borrowed `2.69 lakh crore from the market in two phases and the same has been released to the states/union territories.