Gst: Impact On The Poor

By Author: Nagesh Bajaj
Total Articles: 27
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GST is a destination based consumption tax. Consumption taxes are regressive in nature. It increases the gap between the rich and the poor. The pertinent point is whether such tax would be fruitful for the economy as a whole or not? Is it not so that shift towards the consumption tax would increase inequality? However, there are different ways to combat this inequality. For example, reduced rate of goods and services tax may be applied to certain ‘necessities’ in order to reduce tax burden on the poor. But it is not an effective way to deal with the problem as the rich typically consume more of the ‘necessities’ than the poor. Also it is difficult to ensure that none of the poor people lost out. This is the biggest concern that the oppositions use to oppose a tax on consumption.

The poverty reduction will continue to remain the central objective of the economic policy making in India. Any policy for poverty reduction must enable the provision of at least, food, clothing, shelter, education and health.

The Thirteenth Finance Commission’s Task Force has come out with rational answers to these ...
... queries and said that the proposed switchover to the ‘flawless’ GST should be viewed as pro-poor and not regressive.

The Task Force’s studies show that primary food articles like rice and wheat are liable to tax by many states either by way of purchase tax or sales tax at a lower rate. As a result the incidence of tax on primary food articles comprises of two elements: a) tax on inputs and b) tax on output (primary food article). However, under the ‘flawless’ GST, all food items covered under the public distribution system are proposed to be exempt from GST. So, it is clear that primary food articles like rice and wheat would be exempt from GST (i.e., there will be no output tax). Hence, the tax incidence on such items will be limited to tax on inputs. The GST is designed as a pro-poor policy initiative since expenditure on food constitutes a large proportion of the total consumption expenditure of the poor. In any case, the poor will continue to have accessibility to these items at subsidized prices through the public distribution system.

Basic health and education services are expected to be fully exempt in GST regime. Since these services are necessary to meet the basic human needs, the exemption for these services will enable the poor to have cheaper accessibility. In any case, as at present, these services will continue to be exempt from tax and therefore no additional burden will arise on account of the switchover to GST.

Housing is yet another important item of basic needs of the poor. The Task Force recommended for the inclusion of transactions in real estate within the purview of GST. Therefore, for a registered real estate builder, all taxes on inputs (including on land) will be offset against the tax payable on the constructed property. This will effectively reduce cost of housing to the extent of embedded taxes and hence, benefit the poor.

Another necessary item of consumption by the poor is clothing. The National Council of Applied Economic Research (NCAER) study shows that the implementation of the GST will result in sharp decline in the price of cotton textiles (by 6.44 percent), wool, silk & synthetic fibre textiles (by 11.4 percent) and textile products including wearing apparel (by 17.45 percent). If you will take total expenditure on consumption, the share of expenditure on clothing in case of poor will be relatively higher than in case of rich and the poor will gain relatively more from large drop in prices.

The rural poor comprise essentially of small and marginal farmers and landless labourers. Similarly, the urban poor comprises of the unemployed. The National Council of Applied Economic Research (NCAER) study shows that the implementation of GST will witness an increase in the real returns to land, labour and capital. Therefore, the poor will also enjoy an increase in their income. Similarly, on account of increase in economic activity resulting in higher growth, there will be new opportunities for employment which will directly benefit the urban poor.

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