Based on a certain criteria, taxes are of two types – progressive and regressive.
A progressive taxation means that as a person’s 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 taxpayer’s 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 taxpayer’s ability to pay and the rate of tax. In simple words, regressive taxation puts more burdens on the people with low levels of income.
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.
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.
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.
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?
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 country’s 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. 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 India’s 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”.
Countering criticism from many quarters against levy of GST at many rates, the Finance Minister cited examples of countries with 3-4 slab GST/VATs, even as some rich countries keep fewer slabs. Multiple rates, the finance minister said, are “inevitable” for India.
While adopting multiple GST rates, the justifications offered by the Government are that India, unlike other countries, needs to take care of its population which comes under various economic strata. Even for argument’s sake, the Government justification is accepted, where multiple rates are fixed for various types of goods and services depending on their use by section of the population having different economic capability, can that be a reason for charging different rates at least for the same goods or services? At that time, rate of GST were different for different types of restaurants (rationalised later) and one failed to understand as to why the rate of GST needs to be higher in an air conditioned restaurant. The same dish would obviously cost more in an air conditioned or a high end restaurant in the sense that the additional overhead expenses of a high end restaurant would naturally mark up the cost and make the food costlier consequently ensuring a higher amount of GST in absolute term. While the issue of having multiple rates of GST on different types of products and even having multiple rates for the same type of products helps in injecting a dose of progressivity is a matter of debate, it is beyond argument that such a structure invites complexities. The present GST in India is not ideal and in any case, it could not be ideal or ‘flawless’. However, in its present form it goes against the basic tenets and principle which require GST to be a simple tax and not burdensome – financially, procedurally as well from legal aspects. There need to be exemptions for most of the items of basic necessities predominantly used by the not so privileged class, a very nominal pro poor rate and possibly a higher and common rate for other goods and services. After justifying multiple rate structure, the Government also seems to be realising that the time for rationalisation of the rate structure has come and the Government now seems to be moving towards the same. However the confusion still remains as although on principle GST is a regressive tax, steps taken by the lawmakers has given it some character of a progressive tax. While an Indirect tax having a progressive character is not perceptionally bad, but at the same time it needs to be considered at what cost does this switchover come? It also throws the pertinent question – can an indirect tax take a hybrid character?
Author Bio
