Analysis of GST Impact on Indian Families

Main Discoveries from the Research

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

Rural Regions:

The lowest 50% shoulder 31% of the GST load.

The middle 30% also carries 31%.

Top 20% hold 37%

Metropolitan Regions:

The lower 50% account for 29%.

The middle 30% represent 30%.

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

These results differ from previous studies, like Oxfam’s 2023 Analysis, which stated that the poorest 50% accounted for nearly two-thirds of overall GST collections, whereas the wealthiest 10% contributed merely 3–4%.

How Is GST Meant to Function?

GST is an indirect tax based on consumption that aims for ease and extensive collection.

Basic necessities (like unbranded grains, fruits, vegetables) are generally exempt or taxed at reduced rates to safeguard the impoverished, whereas non-essential and luxury items face higher taxation.

In principle, if the tax were genuinely progressive, higher-income groups would account for a considerably larger portion of GST in relation to their consumption.

Nonetheless, the findings show 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 beneficial but restricted.

Cause of This Trend

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

Restricted Progressivity: Although affluent households buy more luxury goods and heavily taxed products, their proportion of GST contributed does not increase in line with their income.

Tax Framework: GST exclusions on essential items assist, yet they don't sufficiently alleviate the strain from impacting the lower and middle-income brackets.

Indirect Nature of GST: GST imposes taxes on spending rather than on income, rendering it inherently less progressive compared to direct taxes.

Implications

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

Possible Regressivity Since the poorest people spend the majority of their income on consumption, GST may be regressive for 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 Framework: Continually update the basket of low-tax and tax-exempt necessities in response to changing household consumption statistics.

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