Swipe, Tap or Click: How digital payments power our GST intake

Around the same time, a real-time payment system developed by the National Payments Corporation of India (NPCI) was launched that would fundamentally change the digitization of payments in the country. Enter Unified Payments Interface (UPI). UPI, regulated by the Reserve Bank of India (RBI) and running on the back of an open-source API, Immediate Payment Service (IMPS), facilitated the explosive growth in peer-to-peer as well as peer-to-merchant transactions. Is. ,

In December 2022, over 7.8 billion UPI transactions were recorded, with a value of over 12.8 trillion. Exactly a year ago, in December 2021, the corresponding figures were 4.6 billion and less 8.3 trillion. This represents a growth of 71% in volume terms and 55% in value terms (bit.ly/3XeTqHo, It also indicates a decreasing ticket size of payments being made, which points to greater penetration and adoption by smaller merchants/payers. Already less than half of all payments done on UPI 200 (bit.ly/3VYzOG4,

This growth has been accompanied by an increase in GST revenue and a substantial increase in the GST taxpayer base. At the time of the introduction of this tax regime in mid-2017, the number of taxpayers stood at a little over 6.2 million. This figure is set to increase to over 14 million in November 2022. On the other hand, the number of registered active companies in India as of October 2022 was 1,492,015 as compared to 1,157,774 as of July 2017, a growth of 29% (bit.ly/3k8cyIo,

Interestingly, in 2021-22, GST collected from migrated taxpayers contributed about 80.2% of the total GST collection, with the rest coming from new taxpayers (bit.ly/3X8P7NU, This not only indicates the increased formalization of the economy, but also reflects the fact that the new entrants to the GST regime are small businesses or MSMEs. This is further reflected by the average GST collected per migrated GST Identification Number (GSTIN). 4.42 Lakhs and that for new GSTIN 1.13 lakhs.

The rise in digitization of payments is both a cause and an effect of this increased formalization. While many countries have seen a rise in digital payments, what is unique about the Indian story is the administrative underpinnings of the system, which created a non-profit company to provide a digital public good. International organizations including the International Monetary Fund (IMF) have noted that this public good approach to providing digital financial infrastructure is a global best practice and is relevant to all economies, regardless of their stage of development.bit.ly/3wg7ZyJ,

There is significant literature indicating a positive relationship between the digitization of payments and improved tax revenue (Dogan, 2011; Immordino and Russo, 2018; Slemrod and others, 2017). In the Indian context, Jerome Joseph and N. This is discussed in a recent paper by Ramalingam. Monthly GST collections plotted against monthly UPI and IMPS transactions show a broad correlation (see chart above).

The reasons for this correlation are not far to seek. Digital payments leave a digital footprint. With this comes greater traceability and transparency. The increased flow of GST Input Tax Credit (ITC) across the value chain also creates an incentive for upstream and downstream businesses for their transactions, which in turn encourages compliance by all involved. It is a force for formality.

The adoption of digital payment systems has given a boost to small businesses, as it makes bank-to-bank transactions fast and secure, even for small amounts. In addition, it facilitates easy money transfers across cities – a boon for expatriates. The COVID pandemic has also encouraged the adoption of technology, as it reduces the need for physical contact.

As an overview of State-wise growth of GST collections and deposits held by Scheduled Commercial Banks over the last four years, GST collections and deposits held by Scheduled Commercial Banks have broadly maintained momentum (bit.ly/3iuCBcg,

As data costs come down and smartphones become ubiquitous across countries, digital payments are likely to increase further. The digital payments space has seen a lot of activity lately with Singapore adding UPI with PayNow; Bhutan and Singapore already have UPI acceptance at their merchant locations, and the RBI has operationalized its central bank digital currency, with a pilot project specifically for retail e-rupee (e). -R). All this is expected to create a virtuous cycle with GST collections expected to further improve compliance.

The combined potential of GST and India’s digital infrastructure advancement to formalize the Indian economy is both heartening and exciting as it drives financial inclusion and higher incomes for micro and small businesses and hitherto excluded households. This effect is being recognized (econ.st/3kcOsw0) even in skeptical quarters. The payoffs from adding the building blocks of tax reforms and digitization will be evident in our micro- and macro-level indicators in the years to come.

These are the personal views of the authors.

V. Ananth Nageswaran and Devi Prasad Mishra are the Chief Economic Advisor to the Government of India and an Indian Revenue Service (Customs and Indirect Taxes) officer, respectively. These are the personal views of the authors.