GST as a Tax – Regressive, Progressive or Hybrid?

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GST as a Tax Regressive, Progressive or
Hybrid?
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• Based on a certain criteria, taxes are of two
  types progressive and regressive. A progressive
  taxation means that as a persons ability to pay
  tax keeps on increasing, he should be paying more
  taxes. The tax rates increase with every higher
  slabs of taxable income. In simple terms, a
  person with higher ability to pay should pay
  proportionately higher tax and people with lower
  ability to pay should pay lower taxes. Generally
  direct taxes like personal Income Tax and Wealth
  Tax comes under this categorisation. A person
  with higher income should pay Income Tax not only
  of higher amount but also at a higher rate. On
  the other hand, regressive taxation means a tax
  which is levied uniformly irrespective of the
  taxpayers ability to pay. It takes out a larger
  percentage of income from economically weaker
  section as compared to high income earners and
  affects people with low income to a higher degree
  than people with higher income. In regressive
  taxation, there is an inverse relationship
  between the taxpayers ability to pay and the
  rate of tax. In simple words, regressive taxation
  puts more burdens on the people with low levels
  of income.

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• There is a third kind of taxation which is known
  as proportional taxation where the same rate of
  taxation is applied irrespective of the levels of
  income. In India, corporate taxation, taxes on
  partnership firms, tax on capital gains etc. are
  examples of proportional taxation. Indirect
  taxation is generally regressive is nature. Be it
  Sales Tax, Value Added Tax, Excise Duty, Service
  Tax or the modern day Goods and Services Tax and
  such other taxes and duties, all these are
  indirect taxes. It is a transaction specific tax
  which is collected by an intermediary from the
  person who bears the ultimate burden of the same.
  It is generally levied on manufacture, service,
  sales and the like. It is termed as Indirect
  because the burden of payment is shifted, i.e.
  the person who pays it to the Government is
  generally an intermediary like a manufacturer,
  wholesaler, retailer or service provider who
  passes on the burden to the ultimate
  consumer.Read more at https//taxguru.in/goods-
  and-service-tax/gst-tax-regressive-progressive-hyb
  rid.htmlCopyright Taxguru.in

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• Sometimes an attempt is also made to apply the
  principle of progressive taxation to Indirect
  Taxes wherein a certain kind of product or
  service which is generally used by the people
  having higher ability to pay are taxed at a
  comparatively higher rate and items of basic
  necessities are made tax free or taxed at a lower
  rate.In a paper titled Can progressive
  taxation contribute to Economic Development
  published in July 2008, authors Christian Weller
  and Manita Rao observed that progressive income
  taxation may be appealing especially in
  industrializing economies that often have highly
  unequal income distribution. Their paper takes a
  cue from a study by Picketty and Qian (2006)
  which revealed that since tax collection is often
  ineffective and greater enforcement introduces a
  regressive bias, many industrializing economies
  resort to Vat as an alternative source and to
  compensate the regressiveness of a Vat system,
  its implementation is accompanied by progressive
  elements such as an exclusion of basic
  consumption items or the addition of luxury item
  surcharge.Read more at https//taxguru.in/goods
  -and-service-tax/gst-tax-regressive-progressive-hy
  brid.htmlCopyright Taxguru.in

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• In an article titled Taxation for Developing
  Countries, authors Ehtisham Ahmed and Nicholas
  Stern of London School of Economics studied
  various tax handles in the context of Indian
  economy. In their study, they found that the
  Indian example highlights some of the major
  policy issues and paradoxes. First, the move to
  direct taxes may be associated with a desire to
  link taxation to ability to pay and it is often
  claimed that indirect taxes are inegalitarian.
  The validity of this claim depends on the
  context, and the Indian Indirect Taxation Enquiry
  Committee (1978) also supported by Chelliah
  Lal found the incidence of Indian indirect taxes
  during the mid-seventies to be quite progressive.
  If such progression is desired there is the
  further question of how this might best be
  combined with simplicity and administrative
  feasibility. They quoted Goode (1984) which
  reflected a common sentiment that indirect taxes,
  which are a major revenue source in developing
  countries, tend to be regressive with respect to
  income, however, careful selection of objects of
  indirect taxation and tax rates can result in a
  distribution of indirect taxes that is broadly
  proportional or progressive with respect to
  income or total consumption.Read more
  at https//taxguru.in/goods-and-service-tax/gst-t
  ax-regressive-progressive-hybrid.htmlCopyright
  Taxguru.in

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• A study prepared for the Indian Indirect Taxation
  Enquiry Committee Government of India (1978) in
  the late seventies remarked on the progressivity
  of Indian indirect taxes. It has been argued that
  in practice the degree of progression that could
  be achieved through the sales tax, for example,
  is at the expense of complicated rate structures
  and exemptions, leading to revenue losses with
  little impact on progressivity. Gandhi (1979)
  argues for a low, uniform rate sales tax for
  revenue purposes, supplemented by other indirect
  taxes for equity considerations. The authors
  tried to suggest that in practice an important
  degree of progression can be achieved whilst
  retaining simplicity, with a system which exempts
  many foods, has a low uniform rate for most goods
  and a luxury rate for certain other goods. Whilst
  there will always be some losers and some
  gainers, a reasonably progressive VAT package can
  be designed using appropriate exemptions and only
  one or two rates. Now the obvious question that
  comes to the mind is whether GST which is an
  indirect tax and is regressive in principle can
  be tweaked to inject a little bit dose of
  progressivity into it? Since poverty alleviation
  remains the central theme of most of the welfare
  measures undertaken by the Government, can GST
  further its cause or becomes a hindrance to
  that?

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• However, the report of the Task Force of the 13th
  Finance Commission on GST does not think so.
  Their report says that in the Indian economic
  policy context, poverty reduction and inclusive
  growth are key policy objectives and will,
  undoubtedly, continue for some time. They raise a
  pertinent question about the implications of the
  switchover from the cascading and distortionary
  taxation of goods and services to the flawless
  GST on economic growth, equity and poverty. Their
  report points out to the fact that in India, the
  motivation underlying the hugely differentiated
  scheme of indirect taxation of production and
  sales that has evolved over the countrys history
  was progressive and noble the actual impact of
  such a structure is now widely acknowledged to be
  regressive, capricious, and sub optimal in terms
  of the efficiency of tax effort, leaving the door
  open for lobbyists and special pleading. Their
  observation in this regard is contradictory to
  that of the Indian Indirect Taxation Enquiry
  Committee finding. While the Indian Indirect
  Taxation Enquiry Committee (1978) found the
  incidence of Indian indirect taxes during the
  mid-seventies to be quite progressive (1978), the
  task force found the same to be regressive and
  even capricious.Read more at https//taxguru.in
  /goods-and-service-tax/gst-tax-regressive-progress
  ive-hybrid.htmlCopyright Taxguru.in

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• Their report suggests that the overall
  macroeconomic effect of reduction in economic
  distortions due to GST would be to provide an
  impetus to economic growth. Using Computable
  General Equilibrium (CGE) model, the NCAER study
  commissioned by 13th Finance commission shows
  that implementation of GST across goods and
  services is expected, ceteris paribus, to provide
  gains to Indias GDP somewhere within a range of
  0.9 to 1.7 per cent. In respect of GST being pro
  poor, the task force is of the opinion that since
  all the food items distributed under PDS are
  proposed to be exempt from GST, the poor will not
  suffer any additional burden. Basic health,
  education and proposed inclusion of transactions
  in real estate under GST will also help the poor.
  The report concludes that the benefit to the poor
  from the implementation of GST will therefore,
  flow from two sources first through increase in
  the income levels and second through reduction in
  prices of goods consumed by them. The proposed
  switchover to the flawless GST should,
  therefore, be viewed as pro-poor and not
  regressive. Under the circumstances, the obvious
  question that comes to mind is whether GST, being
  in principle a regressive tax, can fit the bill
  or not? Is it possible for the GST to fulfil the
  dual purpose of generating revenue as well as
  being pro poor or have some element of
  progressivity? The initial thought process of the
  Government seemed to point to that direction.
  Before the rollout of GST, at the time of
  finalising the rates, the Council was subject to
  criticisms from various quarters for adopting
  multiple rate structures. The Finance Minister,
  at that time, strongly defended the multiple-rate
  structure for the Goods and Services Tax (GST)
  saying, different items used by different
  segments of society have to be taxed
  differently.Read more at https//taxguru.in/go
  ods-and-service-tax/gst-tax-regressive-progressive
  -hybrid.htmlCopyright Taxguru.in
• Tags goods and services tax, GST