Research on GST Impact on Indian Families

Main Insights from the Research

The research conducted by Prof. Sacchidananda Mukherjee at the National Institute of Public Finance and Policy (NIPFP) emphasizes the subsequent points:

Rural Zones:

Bottom 50% carry 31% of the GST load.

The middle 30% also holds 31%.

The highest 20% account for 37%.

Metropolitan Regions:

The lower 50% accounts for 29%.

The middle 30% represents 30%.

The top 20% carry the greatest weight at 41%.

These results differ from previous reports, like Oxfam’s 2023 Analysis, which stated that the lowest 50% contributed almost two-thirds of total GST collections, whereas the wealthiest 10% contributed merely 3–4%.

What Is the Purpose of GST?

GST is an indirect tax based on consumption, aimed at ease and wide-ranging collection.

Basic necessities (like unbranded grains, fruits, and vegetables) are mostly free from taxes or have lower tax rates to safeguard the impoverished, whereas non-essential and luxury items face higher taxation.

In theory, if the tax were genuinely progressive, wealthier groups would shoulder a considerably larger portion of GST compared to their consumption.

Nevertheless, the above results suggest that the GST is only slightly progressive by global standards, as assessed by different indices (Kakwani Index, Reynolds-Smolensky Index, etc.), and its redistributive impact is affirmative but restricted.

Cause of This Trend

High Essential Expenditure: Lower-income households allocate a significant portion of their overall income to goods/services subjected to GST, despite certain necessities being exempt from tax.

Restricted Progressivity: Although affluent households buy more luxury goods and items subject to high taxes, their portion of GST paid does not increase in proportion to their income.

Tax Framework: GST exceptions on essential items provide assistance, yet they do not sufficiently alleviate the financial strain on lower and middle income brackets.

The indirect nature of GST: GST imposes taxes on spending rather than on income, which makes it less progressive compared to direct taxes.

Consequences

Equity Issues: Because the GST is only slightly progressive, neither income redistribution nor inequality are significantly addressed.

Potential Regressivity: Since the poorest people spend the majority of their income on consumption, the GST may have a regressive effect on them.

Social Justice: The bottom half's ongoing high GST burden may encourage more welfare spending or targeted subsidies in other areas.

The Way Ahead and Necessary Reforms

Boost Progressivity Lower GST rates for products and services that are important to lower-income groups outside of the current list of necessities.

Enhance the Exemption Structure: Based on changing household consumption data, periodically update the basket of tax-exempt/low-tax necessities.

Enhance Data and Targeting: Conduct frequent impact analyses to monitor the distributional effects of GST.