Thanks for your question. We have clarified this in the documentation, and here is what it says.
Incrementing the Version File
In addition to tagging, you should also increment the version file found in your plugin version file or theme settings. This file instructs the October CMS gateway about the latest version, and contains the previous version history.
To help understand how this works:
The gateway uses the version file found in the default branch of the repo.
Composer will install and update using the latest stable tag of the repo.
This means the version file in the default branch should always match the latest stable tag in Git.
Hopefully this helps. Let me know if anything is still unclear.