Study on GST Burden on Indian Households

Brief Context

In Context A recent study analysing Indias Goods and Services Tax (GST) regime using the 2022–23 Household Consumption Expenditure Survey (HCES) has revealed that the bottom 50% of consumers bear the same GST burden as the middle 30%, raising important questions about the tax systems progressivity and equity. How Is GST Intended to Work? GST is a consumption-based indirect tax and is designed for simplicity and broad-based collection.

Source Content

Syllabus: GS3/ Economy

In Context

• A recent study analysing India’s Goods and Services Tax (GST) regime using the 2022–23 Household Consumption Expenditure Survey (HCES) has revealed that the bottom 50% of consumers bear the same GST burden as the middle 30%, raising important questions about the tax system’s progressivity and equity.

Key Findings from the Study

• The study by Prof. Sacchidananda Mukherjee of the National Institute of Public Finance and Policy (NIPFP) highlights the following:
  • Rural Areas:
    • Bottom 50% bear 31% of the GST burden
    • Middle 30% also bear 31%
    • Top 20% carry 37%
  • Urban Areas:
    • Bottom 50% bear 29%
    • Middle 30% account for 30%
    • Top 20% shoulder the highest burden at 41%
  • These findings contrast with earlier reports, such as Oxfam’s 2023 Analysis, which claimed the poorest 50% contributed nearly two-thirds of total GST collections, while the richest 10% contributed only 3–4%.

How Is GST Intended to Work?

• GST is a consumption-based indirect tax and is designed for simplicity and broad-based collection.
• Essential items (such as unbranded grains, fruits, vegetables) are largely exempted or taxed at lower rates to protect the poor, while non-essentials and luxury goods are taxed higher.
• In theory, if the tax were truly progressive, higher-income groups would bear a significantly larger share of GST relative to their consumption.
• However, above findings indicate that the GST is only mildly progressive by international standards, as measured by various indices (Kakwani Index, Reynolds-Smolensky Index, etc.), and its redistributive effect is positive yet limited.

Reason for Such Trend

• High Necessities Spending: Lower-income groups spend a large share of their total income on goods/services that attract GST, even though some essentials are tax-exempt.
• Limited Progressivity: While high-income households purchase more luxury and highly-taxed items, their share of GST paid does not rise proportionately with income.
• Tax Structure: GST exemptions on basic goods help, but not enough to prevent the burden from falling similarly on the bottom and middle income groups.
• Indirect Nature of GST: GST taxes expenditure, not ability to pay, making it inherently less progressive than direct taxes.

Implications

• Equity Concerns: GST’s mildly progressive nature means that it doesn’t substantially redistribute income or address inequality.
• Potential Regressivity: For the poorest, GST can be regressive as they spend most of their income on consumption.
• Social Justice: Persistent high GST burden on the bottom half may push for greater welfare spending or targeted subsidies elsewhere.

Way Ahead & Needed Reforms

• Enhance Progressivity: Reduce GST rates for goods/services critical to lower-income groups beyond the current list of essentials.
• Strengthen Exemption Framework: Periodically revise the basket of tax-exempt/low-tax essentials based on evolving household consumption data.
• Improve Data and Targeting: Adopt regular impact studies to track GST’s distributional consequences.

Source: IE