A higher rate of consumption based tax like GST hurts the poor.
India is the second-most generous country, among 20 major countries
What is the current scenario of India’s direct tax regime?
India has one of the lowest direct tax to GDP (Gross Domestic Product) ratios in the world (Economic Survey -2016).
Higher rate of income tax applies only when one’s income exceeds 2.4 times the national per capita income.
– A lot of income earners legitimately escape the income-tax net.
– The cases of tax evasion are time consuming and involve long legal procedures.
– The tax exemption – bracket can be easily avoided.
– The total exemption granted to the capital gains is ambiguous and helps in tax evasion.
– The share of direct taxes in total tax revenue (both state and Centre) is only 35%.
What is the situation after implementation of the GST?
– All major indirect taxes included under the umbrella of the GST.
– Being a consumption based indirect tax, GST impacts the poor more than the rich.
– The rich have a big share of their income go into savings, which is not taxed (or even subsidized).
– India’s average rate for consumption taxes is higher than the global average.
What are the mechanism to deal with the regressivity of GST?
– Most items consumed by the poor are taxed at a low 5% or 12%
– It is claimed that most of the CPI (consumer price index) basket is taxed at lower rates.
– Some items like food grains are completely exempted.
What can be the impact of classification of taxable items?
The classification will bring distortions, disputes, lobbying and corruption.
Why consumption based taxes are popular?
– They are less trade distortionary.
– They are easier to administer and monitor.
– They have better responsiveness of revenue mobilization in response to growth
– The initial collection figures for GST in India already show higher than expected revenue.
How is it possible to have a progressive GST?
– Greater redistribution of tax
– Greater spending on public goods
– Aadhaar enabled Direct Benefit Transfer