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  • Harika Koppavarapu

Need For Differentiated GST Rates: Addressing The Income Inequality In India

Updated: Nov 19, 2023

To tackle income inequality, India needs to implement different GST rates for different income groups.

The Goods and Services Tax (GST) system in India, implemented since March 2017, consolidates various indirect taxes into a comprehensive regime. It classifies goods and services into different tax slabs ranging from 0% to 28%, with certain essential items exempted from GST. Businesses can claim input tax credit, and the system includes composition schemes for small businesses, simplifying compliance and reducing tax rates. However, income inequality remains a significant challenge in India, with some individuals having significant wealth while others struggle to make ends meet. To address this issue, the government can utilize different tax rates for various income groups within the GST system. By doing so, a fairer society can be created, promoting economic growth and providing support to marginalized communities.

Uniform taxation under the Goods and Services Tax (GST) system has a regressive effect as it applies the same tax rate to all individuals, regardless of income. This places a heavier burden on lower-income individuals, contributing to income inequality. To address this, differentiated GST rates should be introduced, with lower rates for essential goods and services to alleviate the tax burden on the less privileged. By implementing progressive tax policies within the GST framework, income disparities can be mitigated, promoting a more equitable society.

Benefits on the progressive taxation

1. Making taxes fair:

Right now, everyone pays the same tax rate under GST, which isn't fair for people with lower incomes. By having different tax rates based on income, the government can make sure that everyone pays a fair amount of tax according to their ability to pay.

2. Boosting the Economy:

When people have more money to spend, they can buy more things, which helps the economy grow. By lowering tax rates for lower-income groups, the government can give them more money to spend, leading to increased demand for goods and services and boosting economic growth.

3. Helping Marginalized Communities:

India has communities that face unique challenges. By having different GST rates, the government can design policies to help these communities. For example, they can lower or remove taxes on essential things like food, healthcare, and education, making sure that everyone can afford these important things.

4. Supporting Small Businesses:

High taxes can discourage small businesses from growing. By having lower GST rates for small businesses, the government can create a better environment for them to thrive. This means more job opportunities and a stronger economy.

5. Curbing Tax Evasion:

Different tax rates can make it harder for people to avoid paying taxes. When tax rates are high, some people try to find illegal ways to avoid paying. By reducing taxes for lower-income groups, the government can encourage everyone to pay their fair share and help create a more transparent and inclusive economy.

Internationally, countries like New Zealand and Malaysia have incorporated:

New Zealand: New Zealand has a GST system that exempts certain essential goods and services such as groceries and healthcare from taxation. This targeted approach helps alleviate the tax burden on lower-income individuals and promotes progress within the GST system.

Malaysia: Malaysia has introduced a multi-tiered GST system that applies different tax rates to different goods and services. Essential items like food and public transportation are subject to lower rates or exempted, while luxury goods face higher tax rates. This differential treatment aims to achieve a more progressive GST system.

GST in a progressive way can be implemented with some of the following simple mechanisms:

Different Tax Rates:

Have different tax rates based on income levels. People with higher incomes would pay higher tax rates, while those with lower incomes would pay lower rates.

Lower Taxes on Essential Items:

Keep taxes lower on things like food, healthcare, and education that everyone needs to live a good life.

Higher Taxes on Luxury Items:

Increase taxes on luxury items or things that are not essential, like fancy cars or expensive vacations. This ensures that wealthier individuals contribute more.

Help for Lower-Income People:

Provide extra support for those with lower incomes by giving them exemptions or refunds on their taxes.

Use Tax Money for Welfare:

Use some of the tax money collected from higher-income individuals to fund programs that help people in need, such as education, healthcare, or reducing poverty.

Regular Review:

Keep checking and adjusting the tax system to make sure it is working well and helping to reduce income inequality.

By using these simple mechanisms, GST can be made more progressive, ensuring that people with lower incomes are not burdened too much and that wealthier individuals contribute their fair share to support those in need.

To tackle income inequality, India needs to implement different GST rates for different income groups. This approach will make taxes fairer, boost the economy, support marginalized communities, foster small businesses, and reduce tax evasion. It is crucial for the government to strike a balance between generating revenue and addressing income inequality while implementing these differentiated rates. By doing so, India can work towards creating a more equitable and prosperous society for all its citizens.


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