Transmission Mechanisms and Moderating Factors in GST Reform: Evidence from India's Experience

Abstract

While previous research has established the relationship between GST rate reductions and economic growth in India, this paper explores the underlying transmission mechanisms and moderating factors that shape these effects. Using a mixed-methods approach, we decompose the channels through which GST rate changes affect economic outcomes across 22 sectors of the Indian economy from 2017 to 2023. Our findings reveal that price effects (38.5%) and input cost effects (33.4%) constitute the primary transmission channels, with compliance effects (16.0%) and cash flow effects (7.4%) playing secondary roles. Market structure emerges as the strongest moderator of price transmission, with competitive markets showing substantially higher pass-through rates. Implementation quality significantly influences input cost transmission, while initial informality levels moderate compliance effects. We identify significant propagation effects through input-output linkages, with upstream intermediate sectors showing propagation multipliers above 2.0. Strong complementarities exist between rate reductions and administrative improvements, with simplified return filing enhancing economic impacts by 53%. These findings contribute to both theoretical understanding of tax policy transmission in developing economies and practical design of comprehensive indirect tax reforms.