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Indian Express
6 days 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.
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
