Datanomics: GST rate-cut move chases push akin to the Laffer curve

Prime Minister Narendra Modi has announced a reduction in goods and services tax (GST) rates on essential items ahead of Diwali, even as revenue growth under the eight-year-old regime has slowed to its weakest level. The move appears designed to trigger a Laffer curve–type response: Though the principle is rooted in direct taxation, the extension to GST suggests that lower rates could stimulate consumption and curb evasion. The Laffer curve posits that both excessively high and excessively low tax rates are suboptimal for revenue generation.

 

Growth in GST receipts slowed in recent months      

GST collections expanded just 1.7 per cent in July, the slowest growth rate since the Centre began publishing monthly net receipts. June revenues were up a modest 3.3 per cent, the second-lowest pace on record. 

 

  GST-to-GDP ratio lags pre-GST period (in %) 

GST receipts continue to lag pre-GST tax collections (from levies that were subsumed) on critical parameters such as the tax-to-GDP ratio.