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Indian Express
17 hours ago
- Business
- Indian Express
India's bottom 50% of consumers face same GST burden as mid-30%, finds study
The bottom half of India's consumers face the same Goods and Services Tax (GST) burden as the middle 30 per cent, according to a new study that analyses the impact of the indirect tax regime using the Statistics Ministry's Household Consumption Expenditure Survey (HCES) for 2022-23. The study found that the bottom 50 per cent of Indian consumers living in rural areas bore 31 per cent of the GST burden — the same as the middle 30 per cent of rural consumers. The figures were similar for urban areas: the bottom 50 per cent faced 29 per cent of the burden, while the middle 30 per cent bore 30 per cent. In both cases, the top 20 per cent of consumers had to bear the bulk of the tax burden: 37 per cent in rural areas and 41 per cent in urban areas. As per the 2022-23 HCES, the bottom 5 per cent of consumers in rural areas had an average Monthly Per Capita Expenditure (MPCE) of Rs 1,373, while those in urban areas spent Rs 2,001. Among the top 5 per cent, rural consumers had an MPCE of Rs 10,501 while urban consumers spent Rs 20,824, according to the survey. The tax burden is the share of the GST estimated to have been paid by households. The findings of the paper, titled 'Distributional Impact of Indian GST based on the NSSO's Household Consumption Expenditure Survey of 2022-23' authored by Sacchidananda Mukherjee, a professor at the New Delhi-based think-tank National Institute of Public Finance and Policy (NIPFP), are in contrast with a 2023 Oxfam report which said the poorest 50 per cent of Indians contribute nearly two-thirds of total GST collections, with the richest 10 per cent contribute only 3-4 per cent. On the whole, Mukherjee's analysis, released earlier this month, suggested the GST had positive redistributive effects as post-tax consumption inequality declined and is 'moderately progressive'. A tax system is said to be progressive when higher-income individuals pay a higher rate of tax. Mukherjee told The Indian Express that recent literature shows 'most countries following multiple tax rates in GST or VAT system — the European Union follows a multiple tax rate system, for instance — are getting a similar kind of result: progressive, but moderately so.' The paper's findings come amid talk of a major overhaul of the GST rate structure, with The Indian Express reporting earlier this month that Home Minister Amit Shah will begin talks with stakeholders to build consensus and resolve contentious issues. One of the proposals on the table is the removal of the 12 per cent GST rate by shifting some items to the 5 per cent slab and others to the 18 per cent list. In his paper, Mukherjee allocated 390 items from the 2022-23 HCES — after excluding seven items that don't attract GST, such as second-hand books — into the various GST buckets. However, assigning a specific tax rate to each item was difficult as rates also depend on marketing or physical features (packaged or labelled), as well as the presence of certain specific rates — for instance, a 6 per cent rate is charged on brick kilns under composition scheme, without input tax credit. These are in addition to the major GST rates of nil, 5 per cent, 12 per cent, 18 per cent, and 28 per cent. As such, the 390 items were distributed across nine broad buckets: exempt, exempt to 5 per cent, 5 per cent, 5-12 per cent, 12 per cent, 12-18 per cent, 18 per cent, 28 per cent, and more than 28 per cent. Items that are not under the GST, such as alcohol and fuel, were part of a separate 'Out of GST' category. This categorisation led to 154 of the 390 items falling in the 'exempt' and 'exempt to 5 per cent' buckets, with 105 of them being food items, while most items attracting GST rates of 12 per cent or more were non-food. In spending terms, 45 per cent of average MPCE was on items in the 'exempt' and 'exempt to 5 per cent' buckets in both rural and urban areas. Meanwhile, 9 per cent of rural MPCE and 10 per cent of urban MPCE was on items in the 'Out of GST' category. After making adjustments to the MPCE given in the 2022-23 HCES for each fractile class — bottom 5 per cent, bottom 5-10 per cent, and so on until the top 5 per cent — the paper found that the bottom 5 per cent of consumers in rural areas spent more than 47 per cent of their MPCE on items either exempt from GST or attracting a rate of up to 5 per cent. This share fell before rising for the top two categories of consumers, namely those in the 90-95 per cent and 95-100 per cent fractiles, suggesting increased consumption of more expensive and processed food items at higher consumption levels. The paper warned that reducing the number of items exempt from GST may increase the tax burden for least-consuming people in rural areas. Careful redesign needed Mukherjee also warned that increasing the tax rate on items in the 5-12 per cent bucket may increase the tax burden on those in lower consumption classes in both rural and urban areas since the share of MPCE spent on these items was higher for consumers in lower fractile classes. Meanwhile, changes in expenditure share of items in the 12-18 per cent bucket across consumption classes was more complex, with the paper saying that increasing the GST rates on these items 'may not be regressive if designed carefully'. The issue of rationalisation of GST rates has been pending for several years, with a Group of Ministers for the same set up way back in September 2021. However, talk of the need to make changes to GST rates has risen recently due to the subdued performance of urban consumption in particular. Earlier this month, Confederation of Indian Industry President Rajiv Memani called for a reduction in tax rates on certain goods, especially those that are purchased by people in lower-income categories. This, Memani argued, would hopefully boost consumption.
The Hindu
5 days ago
- Business
- The Hindu
Indian inequality and the World Bank's claims
Inequality is an important concern for the political economy of a democracy. However, the Indian inequality debate is often characterised by the selective use of data to make exaggerated claims that fuel misperceptions rather than result in a better understanding. The sharp reactions to a recent World Bank report ('India Poverty and Equity Brief: April 2025') are an illustrative case in point. The World Bank report claims that India has almost eradicated extreme poverty. Further, it claims, the country has significantly reduced consumption inequality since 2011-12, in terms of consumption patterns of the population. In terms of the Gini coefficient, a measure of inequality, the report (without separating the consumption and income inequality-based estimates) has placed India among the top four least unequal countries. These findings have created quite a stir, as the media and the public are accustomed to reports claiming very high inequality in India. What has happened? What it is based on The World Bank's claims about the Indian inequality are based on the official Household Consumption Expenditure Survey (HCES) data for 2022-2023. This data is collected using the modified mixed reference period (MMRP) method, which employs the state-of-the-art statistical technique. As the World Bank report correctly observes, 'The MMRP is considered an improvement and alignment with international best practices...' The World Bank has adjusted the Indian data to account for some but not all government-provided free goods and services. The World Bank finds that during 2011-12 and 2022-23, India registered a major decline in consumption inequality; in this period, the consumption-based Gini coefficient dropped from 28.8 to 25.5. Critics of the report argue that the World Bank has underestimated the inequality, as the HCES data does not capture consumption by the rich. It is a valid critique, but India is not an exception. This limitation applies to all survey data in all countries and, in itself, does not question the broad ranking of countries. Even if we discount the precision of the World Bank's inequality estimates, a significant improvement in India's international ranking is a fact. Of course, we should not confuse consumption inequality with income inequality. The decrease in India's consumption inequality is substantial and indisputable. To address the data issue, let us assume that the problem of missing elite consumption is more pronounced in India — say, the HCES rounds do not capture consumption by the top 5% families at all. In that case, going by the consumption expenditure data, it is irrefutable that the consumption inequality has decreased between 2011-12 and 2022-23 for the remaining 95% of the population covered in HCES data. The HCES data show that the country's consumption basket is healthier today than ever. Between 2012 and 2023, the per capita availability of milk and eggs has increased by 45% and 63%, respectively. The availability of fruits, vegetables and protein products has increased. The share of cereals in the food bill, as well as calorie intake, has decreased, while that of healthier products has increased, for all strata. All this improves the diet for the 95%, rather than the richest groups, whose consumption already matches the best in the world. The dietary intake improvements are most striking for the bottom 20% of households in rural and urban areas, even if we ignore the free food and cash transfers received by these groups. The share of rural households consuming fresh fruits (to a different frequency) has increased from 63.8% in 2011-12 to 90% in 2023. The 2022-23 and 2023-24 rounds of consumption data irrefutably demonstrate that extreme poverty has been almost eradicated. Whether we use the Rangarajan, Tendulkar, or the multi-dimensional poverty index of NITI Aayog, poverty has declined significantly. Based on the International Poverty Line of $3 between 2011 and 2023, India has pulled around 27 crore people out of extreme poverty. Independently, the nightlight data show a significant increase in ownership rates of pucca homes and paved roads in rural areas over the last 10 years, owing to the Pradhan Mantri Gramin Awas Yojana and Pradhan Mantri Gram Sadak Yojana. Among the poorest 20% of households, more than 40% own a vehicle today, compared to just 6% in 2011-12. This enables rural workers to work part-time in nearby cities without having to migrate. If we factor in these and the other policies targeted at the bottom of the pyramid, such as Ayushman Bharat, the aggregates of welfare for the poor would look even better. Examining income levels True, it is important to examine income inequality separately from consumption inequality. There is no official income survey data yet. The mainstream media and commentators use the income shares of the top 1%, as estimated by the World Inequality Lab (WIL) to argue that the income inequality is very high in India, disregarding critical limitations of these estimates. Given the lack of data on income distribution, the WIL uses the income tax data to estimate top income levels. They use the old consumption data and estimates of the income-consumption relationship to estimate income for low- and middle-income households. The latter estimates unrealistically assume that consumption expenditure exceeds income for 70%-80% of households. How can it be that all families, except the top 20-30%, spend more than they earn, year after year? As an inevitable consequence of using such an implausible assumption, the income of the bottom 80% gets underestimated. This reduces their estimated share of national income. Conversely, shares of top income groups are overestimated. Even if we ignore these limitations, we do not find an increase in income inequality. Taking the WIL estimates as they stand, the national income shares of the bottom 50% have increased from 13.9% in 2017 to 15% in 2022. During the same period, the share of the top 10% has decreased from 58.8% to 57.7%. The high national income shares of the top 1% are a matter of concern. However, since 2017, the income shares of the top 1% have increased by only 0.3 percentage points. Research by this writer indicates that a part of this increase is attributable to improved income reporting by affluent groups in response to the Centre's anti-tax evasion measures since 2016-17. Better reporting should not be mistaken for increased inequality. Furthermore, the WIL inequality estimates used by the media and commentators are based on pre-tax income levels. However, it is the post-tax and post-subsidy/transfer income that matters to people. Therefore, to be meaningful, income inequality estimates should be based on the post-tax rather than the pre-tax income. For instance, in the assessment year 2023-24, the top 1% of all taxpayers accounted for 72.77% of the total tax paid. Even in the individual category, the top 1% paid 42% of the total tax paid. Arguably, wealthy individuals should pay more taxes, but the point is that even at the existing tax rates, the actual post-tax income of top-income taxpayers is only 65%-75% of the levels used in headline-grabbing estimates. For low-income groups, in contrast, the income levels used are smaller than the actual effective income, which is higher, due to the all-time high welfare transfers that account for more than 8% of GDP. On a post-subsidy, post-tax income basis, over the last decade, we will find a decrease in income inequality in recent years. The other story about India Admittedly, we must travel a long way before we can claim to be an egalitarian society. Inequality in accessing quality health and education is a serious concern. For a country of our size and diversity, inevitably, there are many lived realities. However, the story of India is not just about poverty and inequality any more; it is about progress and aspirations too. While being mindful of the current problems and challenges ahead, let us also celebrate the country's successes. Ram Singh is Director, Delhi School of Economics, Member, Monetary Policy Committee of the Reserve Bank of India (RBI) and Member, Technical Expert Group for the First Household Income Survey, Ministry of Statistics and Programme Implementation (MoSPI), Government of India. The views expressed are personal
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Business Standard
15-07-2025
- Business
- Business Standard
Has Indian inequality declined? Post-tax income data holds the answer
Many who are accustomed to media reports claiming high inequality in the country have responded to the WB's claims with scepticism or outright dismissal Ram Singh Mumbai Listen to This Article A recent World Bank (WB) report has claimed that between 2011-12 and 2022-23, India significantly reduced consumption inequality. India's Gini coefficient (a measure of inequality) is ranked as the fourth-lowest in the world. The WB's estimates of Indian inequality are based on the official Household Consumption Expenditure Survey (HCES) 2022-23 data, after accounting for some but not all government-provided free goods, and excluding consumer durables. Many who are accustomed to media reports claiming high inequality in the country have responded to the WB's claims with scepticism or outright dismissal. The critics argue that, as HCES data does not capture consumption
Mint
15-07-2025
- Business
- Mint
Ajit Ranade: A progressive GST is easier to promise than achieve
This month, India's goods and services tax (GST) completed eight years. This is a milestone reform. It is a consumption tax that unifies the national economic market, getting rid of inter-state frictions and tax cascades, and is fully electronic with in-built incentives for compliance and prevention of leakage. In the five years since 2020-21, annual gross GST collections have more than doubled to ₹22 trillion. This growth has generally kept pace with that of India's nominal GDP, although its promise was of higher buoyancy. It still leaves out nearly half the economy—most notably fuels, energy and electricity—from its purview. Even among the items covered, it has too many exemptions. Perhaps that explains why its gross mop-up is still around 6.8% of GDP, although it is on a gradual upward trajectory. The number of registrations under GST rose from 0.65 million in 2017 to 15 million now. Also Read: Mint Quick Edit | India's GST peak is reassuring Even after eight years, one can't escape the feeling that GST is still a work-in-progress. Frequent changes in tax rates are unsettling and its multitude of tax slabs is a big problem. Its apex governance body, the GST Council, has met 55 times in the past eight years and has had to grapple with rate changes and item classifications on numerous occasions. A tax system should be stable and predictable, and hence such frequent tweaks are not healthy for this tax or the economy. Constant tinkering can lead to disputes in classification or interpretation, even problems of discretion and outright corruption. Legal cases are mounting. The GST Appellate Tribunal was given formal birth in 2024, but is yet to be constituted. This has led to a growing backlog of appeals, with taxpayers turning to high courts, overburdening the judiciary and disrupting the dispute resolution mechanism, a key feature of this tax. Also Read: Indian gig workers who offer mobility services deserve GST relief The major conceptual issue has been the progressivity of GST, which is an indirect tax. The tax paid does not depend on the payer's income, but only on the value of the good or service being sold. If we had a single GST rate for all goods and services, then it would be regressive. It would violate the requirement that a tax system has to be fair. The burden should be relatively higher on richer folks. Note the word 'relatively'; it means that as a fraction of their income, the rich are expected to bear a higher burden than the poor. But since the poor spend almost all their income on consumption, a consumption tax is regressive by itself. This is one of the main reasons that demands arise for exemptions and lower rates. Also Read: Simplify India's GST regime: The case for it is clear and it's time to act A recent paper by professor Sacchidananda Mukherjee of the National Institute of Public Finance and Policy (NIPFP) analyses the distributional impact of GST using the Household Consumption Expenditure Survey (HCES) of 2022-23. The survey had a sample of 261,746 households and covers 390 consumption items. His main finding is that GST is moderately progressive based on multiple indices. The tax burden in rural areas on the bottom half is only 31% and is the same on the next 30% of the households. The top 20% bear 37% of the GST burden. In urban areas, the burden shares are 29%, 30% and 41% respectively for the bottom 50%, mid 30% and top 20% of households. This progressivity is mainly because the lower fractiles, both in rural and urban areas, spend more on food that is either exempt or taxed at just 5%. Thus, raising the rates on these lightly taxed items would disproportionately hurt the poor. Even merging the 12% and 18% rate slabs, which seems in the offing, would affect the poor. Note that in this research, the progressivity of GST is assessed using consumption data and not income. Progressivity is achieved without using income targeting through differential GST rates on essential versus luxury goods and by spatial variations that catch the urban rich who consume more durables and services. Also Read: How India's GST revenues can sustain their incline India's share of indirect taxes in total taxes has drifted higher in recent years. This has raised concerns about the regressive nature of taxation overall. The NIPFP paper shows that GST is not regressive because of its design. It might be worth recalling the classic 1976 paper of Anthony Atkinson and Joseph Stiglitz on the design of a tax structure with both direct and indirect taxes. They asked whether governments should rely on indirect taxes (like VAT or GST) in addition to direct taxes (like income tax), or just stick to an optimal income tax to achieve fairness, redistribution and efficiency. Their main result was that the latter works best under some idealized conditions and there is no need for any indirect tax. This is what purists swear by. But their result has caveats relevant to the real world. For instance, if the rich and poor consume very different baskets of goods, then taxing luxury items helps redistribution. Or, if lack of information or a large informal sector makes tax implementation difficult, then indirect taxes can be more effective; they can be made progressive too. India's pending GST reforms include a reduction and rationalization of its rate slabs and the expansion of its coverage. A consumption tax can at best be mildly progressive but cannot be used for redistribution. Simplifying and reducing rate slabs, which is imperative, will make progressivity harder to achieve. Achieving it by using a basket of goods consumed as a proxy for household income is unstable. It is also paternalistic, for it punishes households that are aspiring to and adopting luxury goods. And with better means of gathering income information, surely focusing on direct taxes is a better way to pursue fairness and tax efficiency. The author is senior fellow with Pune International Centre
Deccan Herald
13-07-2025
- Business
- Deccan Herald
Data and distortion: Decoding inequality in India
In July 2025, the government's Press Information Bureau celebrated a World Bank brief that proclaimed India had become the fourth most equal country in the world, citing a Gini index of 25.5. According to the World Bank's 2025 Poverty and Equity Brief, India's consumption-based Gini coefficient declined from 28.8 in 2011–2012 to 25.5 in 2022–2023. The Gini index is a widely used measure of inequality, where 0 denotes perfect equality and 100 indicates perfect inequality. A lower Gini index, therefore, implies a more equal distribution of income or the brief itself clarified that this figure refers to the consumption Gini index calculated using the 2022-2023 Household Consumption Expenditure Survey (HCES) and warns that inequality may be underestimated due to data and sampling limitations. Therefore, the celebratory headlines following the PIB release were based on a measure of consumption inequality, while many international rankings use income-based Gini indices—a mismatch that calls for closer scrutiny. .The 2022–2023 HCES marked a significant methodological shift from earlier rounds. It adopted the Modified Mixed Recall Period (MMRP), using shorter recall periods (e.g., 7 days) for frequent purchases like food and longer periods (e.g., 365 days) for less frequent purchases like durable goods, replacing the fixed 30-day Uniform Recall Period. Additionally, it valued all goods, including those provided free or at subsidised rates, at their market price rather than the price actually paid by households. These adjustments led to capturing higher levels of reported methodological changes play a key role in the low consumption-based Gini index for India. While these changes have garnered some critics, they are largely in line with global best practices. However, the World Bank brief does provide a caution that 'sampling and data limitations suggest that consumption inequality may be underestimated' in critical point remains that the Gini coefficient reported in the World Bank brief is based on consumption, not income. Consumption-based Gini indexes are typically lower than income-based Gini indexes. Understanding this difference is key to interpreting claims about India's relative equality in a global context. Wealthier households typically save a large share of their income, resulting in a smoothing of consumption that hides the volatility of income. As a result, their consumption patterns appear more equal than their income. Thus, India's consumption Gini index cannot be equated to other countries' income Gini index to conclude where India ranks in terms of equality. .By contrast, income-based measures tell a very different story. The World Inequality Database (WID) estimates India's income Gini at 62 in 2023. It classifies India as one of the most unequal countries in the world and also claims that inequality in India has been steadily increasing ever since liberalisation. It is also referenced within the same World Bank brief as an alternative viewpoint. However, these numbers come with their relies heavily on tax records to compile its database. Several Indian economists point out that changes in tax policy and compliance can skew these instance, rising incomes reported at the top may partly reflect better tax compliance (as rates fell), not a real jump in inequality. Similarly, tax evasion is another major factor that is difficult to account for. Therefore, while the WID paints a grim picture, its methodology has been challenged in a private think tank called PRICE has conducted intensive income surveys and finds a higher Gini than the World Bank's but lower than WID's. PRICE reports India's income Gini at about 41 in 2022–23. This implies that income inequality in India is substantial, though still below WID's level of 62. Of course, household income surveys have their own pitfalls. Self-reported income is notoriously unreliable, with people often under-reporting, especially at the top. Recent RBI research confirms that the wealthiest Indians report incomes far below what their assets would imply. .While the claim that India is the 4th most equal country in the world is not supported by the evidence, understanding the extent of inequality in India is limited by the lack of quality data. Consumption data shows low inequality, while income data shows higher inequality, and each data source comes with its limitations. Recognising this, MoSPI has recently pledged to conduct an All-India Household Income Survey. This will be India's first full-scale income distribution survey in planned survey will be guided by experts and is intended to incorporate global best practices in design and coverage. Until it is conducted, we must rely on piecemeal indicators and treat headline claims with now, all evidence suggests that India is far from the 'equal' club. Until better data is available, it is important to keep an open mind to all these data points and their caveats and not be swayed by oversimplified headlines..(The writer is an independent researcher)
