'Singular GST slab can't be...': Economist Ajit Ranade says current structure is 'mildly progressive'

Economist Ajit Ranade on Saturday reacted to a working paper that described India's Goods and Services Tax (GST) as "moderately progressive". He said that such a conclusion wouldn't hold if the tax structure were singular and uniform.

"Very interesting finding. If the GST rate was uniform, singular, and all-encompassing (i.e. all goods and services), then as a comprehensive consumption tax, it CANNOT be progressive. For the simple reason that consumption spending of the poor as a share of their income is higher, and hence the relative burden of a consumption tax is higher," Ranade wrote on LinkedIn.

He added that India's GST system does not cover the full economy and includes multiple tax slabs, which may explain the study's outcome. "But India's GST is NOT all-encompassing (only about 50 percent of GDP included), and we have multiple rate slabs going from zero to 18 and 28 and even higher rates on luxury goods. So due to non-all-encompassing nature, and progressive rates, it is possible that GST is mildly progressive. But it is definitely a non-intuitive finding!"

Ranade was responding to a post by Sacchidananda Mukherjee, Professor at the National Institute of Public Finance and Policy (NIPFP), who shared a July working paper noting that "the Indian GST is moderately progressive. The redistributive effect of Indian GST is positive, as post-tax consumption inequality decreases."

The NIPFP paper draws on data from the National Sample Survey Office's (NSSO) Household Consumption Expenditure Survey (HCES) 2022–23, covering 2.6 lakh households and 390 consumption items across rural and urban areas. Though it does not include household income data, the paper evaluates the GST's impact based on average monthly per capita expenditure (MPCE).

"Taxes on commodities and services account for more than three-fifths (62.3%) of India's general government's total tax collection," the paper states. "GST contributes half of the total tax collection from commodities and services; therefore, it is essential to assess the distributional impact of GST across consumer groups."

The findings suggest that the bottom 50% and middle 30% of consumers bear 31% each of the GST burden in rural areas, while the top 20% bear 37%. In urban areas, the distribution shifts slightly, with the bottom 50% contributing 29%, the middle 30% 30%, and the top 20% bearing 41%. The authors used several metrics, including the Kakwani Index and Reynolds-Smolensky Index, to measure progressivity.

Earlier this month, Business Today reported that the GST Council may overhaul the current structure. Sources told Business Today TV that the GST Council may consider collapsing the current multi-rate system into a simplified three-slab model — possibly 8%-16%-24% or 5%-14%-24%. Scrapping the 12% slab could raise the cost of commonly used items like mobile phones.

With GST revenues now consistently crossing Rs 2 lakh crore per month - double the levels from four years ago - policymakers may have fiscal space to attempt simplification.