The goods and services tax in India will benefit the lower and lower-middle income class as it is likely to reduce the tax rate on goods, a blog posted on Asian Development Bank’s website said.
It will mitigate significantly the negative impact of goods and services tax (GST) on the “bottom half” of the population, said the blogpost written by Mukul Asher, Professorial Fellow, Lew Kuan Yew School of Public Policy.
In general, GST is likely to reduce the tax rate on goods as compared to previously, while tax rates on services are expected to increase, the blog said.
As households progress towards higher income brackets, the share of household budget spent on services increases and on goods declines.
“So, the above overall trend would exhibit tendency towards lower burden for low and lower middle-income households, while the reverse is likely for upper middle income and high income households.
“This would significantly mitigate the negative impact of the GST on the bottom half of the population,” reads the blog.
It has been about six weeks since GST became operational on 1 July, and the impact on overall economy business, households and government organisations is expected to be multi-faceted, Ahser said.
The impact will be felt by different sectors over differing period in a dynamic and non-linear pattern, he added.
The blog said the impact of GST may vary as the household bundle of goods and services differs with income level, preference, age composition and others.
He also said it is differential, not the absolute tax rate that matters to assess GST impact.
Further, the timing of GST has been favourable from global and domestic perspective in minimising the impact of GST on cost of living.
“The design of the GST and government initiatives has also helped in this respect. The media and other stakeholders, and the households themselves need to also play a constructive role in adjusting to the GST,” Asher said.
A more service-oriented culture, backed by technology and professionalism by the GST tax authorities could help sustain the apparently small initial impact of the GST on the cost of living over a much longer period.