THE REGRESSIVE BITE OF INDIRECT TAXES

INDIA’S INDIRECT tax system, chiefly the Goods and Services Tax (GST), poses unique challenges to economic equity. Despite its intended purpose of streamlining taxation and spurring growth, the GST has compounded the existing regressive nature of indirect taxes, disproportionately affecting the lower-income part of the country’s population.

- Vikas Singh

The question of who bears the burden of taxes – and how to rebalance it – is vital as India aims for equitable growth and uplifting its underprivileged population. A comprehensive Crux study of 4,000 individuals, along with insights from 60 economists and policymakers, underscores the adverse effects of high GST rates on essentials. This is significant in a nation where 70 per cent of workers earn less than the per capita income and over 80 per cent depend on subsidised grains. Examining global practices, the study offers pathways for India to reform its indirect tax system for sustainable growth.

High Cost of Discriminatory GST Rates & the Regressive Impact: Unlike direct taxes, which target income or wealth, indirect taxes cast a wide net over all consumers, irrespective of their financial standing. This indiscriminate approach disproportionately burdens lower-income households, who allocate a significant portion of their income to essential goods and services. As a result, the regressive nature of indirect taxation becomes starkly apparent, sparking widespread debate and concern.

The consequences of indirect taxation are particularly severe. Millions living below or near the poverty line find their limited budgets further strained by indirect taxes. Even minor tax-induced price hikes on essential goods can have a devastating impact. This regressive system traps poorer households in a vicious cycle, as high indirect tax costs on necessities limit their ability to save and climb the socioeconomic ladder. The situation is further compounded by the high and disparate GST rates imposed on essential items like food, medicine, and utilities, amplifying the regressive burden.