New Study Shows Bottom 50% Bear Undue GST Burden

New Delhi: The bottom 50% of Indian consumers pay the same amount of Goods and Services Tax (GST) as the middle 30%, a new study by a Delhi-based think tank has shown.

The study, authored by Sacchidananda Mukherjee of National Institute of Public Finance and Policy (NIPFP), used data from the Household Consumption Expenditure Survey (HCES) for 2022-23 to analyse the impact of the indirect tax regime on consumption. 

It found that both the bottom 50% and the middle 30% of Indian consumers living in rural areas shared 31% of the GST burden. Similarly, in urban areas, the bottom half and the middle 30% groups faced 29% and 30% of the GST burden respectively.

The top 20% in rural areas accounted for 37% of GST collection while those in urban areas accounted for 41%.

According to the Indian Express, the findings of this study contradict a 2023 Oxfam report that said the poorest 50% of Indians were paying two-thirds of the total GST collection while the richest 10% accounted for a mere 3-4%.

The latest study, however, suggests that GST is “moderately progressive” as it has had a redistributive effect. A tax system is considered progressive when higher-income groups pay a higher rate of tax.

The study has come amid talks of a major overhaul of the GST brackets. Among the proposals for this overhaul is the elimination of the 12% slab by dividing goods from this bracket between the 5% and the 18% slab, the Indian Express reported.

The study divided 390 items across nine categories: 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 like alcohol and fuel were part of a separate ‘Out of GST’ category.

According to Mukherjee’s study, 45% of the monthly per capita expenditure (MPCE) in both rural and urban areas was on items in the ‘exempt’ and ‘exempt to 5%’ GST buckets. Items in the ‘Out of GST’ category accounted for 9% of rural MPCE and 10% of urban.

The study found that 47% of rural consumption was limited to items that were either exempt from GST or had a GST rate of up to 5%.

The study warned that reducing the number of items exempt from GST may increase the tax burden for least-consuming people in rural areas. It also cautions against increasing the tax on items in the 5-12% slab as that would increase the tax burden on low-income households in both urban and rural areas.

Mukherjee argued that while the consumption of items in the 12-28% bucket was complex, increasing the tax on these items “may not be regressive if designed carefully”.

Rs 99,000 crore foregone in corporate tax revenue in 2023-24

Indirect taxes like GST are considered regressive as they increase the tax burden on the poor. The share of indirect taxes in the country’s total tax collection has been rising since GST’s implementation in 2017, while the share of direct taxes as well as corporate tax has fallen.

The Union government told the parliament on Tuesday that nearly Rs 99,000 crore were foregone in corporate tax revenue in 2023-24 on account of tax incentives extended to corporates.

The corporate tax revenue foregone in 2023-24 stood at Rs 98,999 crore, followed by Rs 88,109 crore and Rs 96,892 crore in 2022-23 and 2021-22, respectively, Union minister of state for finance Pankaj Chaudhary said.

Corporate taxes have seen a reduction since 2016 when the Finance Act was amended to reduce tax rates to 29% of the total income. In 2017, corporate tax rates were reduced to 25%. In 2019, another cut in base corporate tax for existing companies was announced, reducing rates to 22% from 30%; and for manufacturing firms established after October 1, 2019, to 15% from 25%, if they forewent all exemptions and incentives.