The goods and service tax [GST] has divided economists, social researchers, and politicians in understanding its overall impact on the Indian economy, the State, and the people. On one side, the opponents find it to be only a regressive indirect tax, hampering the MSME sector, which might marginally increase the state revenue but increases the general inequality much more as the tax collected is not linked to the income levels of the taxpayers. On the other hand, the advocates of GST cite the manifold increase in tax collection since implementation and the increase in overall supply chain efficiency because of the reduction in time spent on tolls while classifying the early hassles in tax slab determination and software glitches as “teething issues.”
This article attempts to identify the opportunities for investigating the potential effects of GST on income inequality at the individual and state levels. The article also explores the potential role GST can play in enabling Indian states to capture the most from the changing dynamics of International Relations.
The global agenda on Sustainable Development Goal 2030 emphasizes reduced inequality as SDG-10, having several targets, including reducing disparities of the outcome by eliminating discriminatory laws, policies and practices and promoting appropriate legislation, and action in this regard.
The impact of GST on economic equality is a complex issue and needs further examination. This can be done by dividing the economic impact into individual and federal equality. For individual economic inequality, we can examine the effect of GST on indirect taxes and the slab rates across product classes in different income categories. For federal inequality (i.e., the difference in per capita incomes of states), the shifting of tax revenues from states needs to be examined.
The impact on individual inequality: Slab rates
The slab rates have been a constant source of debate, and the Indian Government has been changing them to meet the needs of the low-income population in line with principles of natural justice, which in this case means lower tax rates for essential products. The challenge is that some of these products are also consumed by the high-income population, and it is challenging to build a mechanism that can charge different tax rates for the same product based on the buyer’s income level. This extra tax is then adjusted through an additional tax on the already high tax rates for products exclusively used by the high-income category. There is a scope to conduct quantitative and qualitative studies to assess this impact.
The impact on states: From production to consumption
A key feature of GST is that it is collected at the point of consumption, unlike the previous tax regimes (excise duty), where it was collected at the State of production. The previous tax system benefitted the states with high production capacities (e.g., Tamilnadu and Maharashtra), which also had high per capita incomes. In the Indian federal structure, the most populous states have small manufacturing bases relying primarily on agriculture and services for economic value creation, resulting in lower tax collection. GST has shifted this tax revenue from the states with higher per capita income to their lower-income counterparts (e.g., Bihar, West Bengal, UP etc.). There needs to be more than this shifting to create the desired impact of increasing the income levels in low-income states. Fair and timely distribution of State’s share of GST from the Centre to these States, use of this income in employment-generating activities and impactful welfare schemes are the next necessary steps needed to create a meaningful use of these revenues. A study can be conducted to estimate the impact of GST on the change in States’ income.
The future of the Indian economy and GST
India is at the cusp of transforming itself from a primarily agricultural and service-based economy to a manufacturing base emphasizing local and external markets. The already existing Make-in-India policy makes Indian manufacturing the critical driver for growth in the coming decades. Many countries and companies have adopted the “China+1” policy to mitigate their global supply chains from the disruptions evident during the past decade. Having all the suppliers in one source country, especially for critical components, might quickly become a thing of the past. This is expected to benefit countries like Vietnam, India, Philippines, Poland, Mexico as companies begin to relocate their new manufacturing bases close to home, low to medium-cost, reliable locations. India meets many of these criteria, and the tailwinds from the “China+1” strategy will further propel the “Make-in-India” ship.
The promise of growth and the reality of inequality:
Will the Indian growth led by manufacturing in the coming decades be equally distributed across states is a crucial question. Three significant reforms needed for economic transformations: land, labour, and agriculture- have been rolled back or put on the back burner in the past few years by the Central Government. This means that states must implement some form of these reforms indirectly to create a conducive environment for setting up the substantial manufacturing bases that need low-cost real estate, skilled labour, and tax exemptions from the State to remain cost-effective and competitive in the global markets. This is not something states can do overnight or even in a decade. States must show a consistent track record of being “industry-friendly” before they can even apply for hosting billions of USD investments. Most likely, the few states (Gujrat, Tamilnadu, Maharashtra, UP (probably) that have already taken steps and made policies in this regard will take away the lion’s share of these future investments, further deepening the rich-poor divide amongst the Indian states. Some states like Maharashtra and UP claim to implement policies that will propel them to the coveted 1 trillion economy status. If this comes to be materialized even partially, the other smaller states will need help to match, cope and attract investments.
Can GST save the day?
As argued in the previous section, GST mitigates this production-led economic divide between states to some extent by shifting the tax from production to consumption. This will only be true for products consumed internally within India and not for exported products. It is also expected that the share of these exports will increase in the coming decades, and this mitigating impact might lose some of its force. It will then be upon the Central Govt. to decide how to use its share of GST to improve the economic situation of these “left-behind states”. This can be done by providing “special” status, infrastructure spending and welfare schemes for specific states.
This is not a big challenge in the case of smaller states with less population, unlike bigger states. To receive these “favours” from the Central Govt. the states will have to be “aligned” politically and economically with the Centre, which is very difficult for some, as evident through the history of independent India. Many states and their people have chosen economic decline over alignment with the Centre and, in many cases, have gone to the extent of “cutting their noses to spite the face”. “Everything is geopolitics” is a familiar phrase in international diplomacy, it may be rephrased to “almost everything is GST-politics” in the context of income inequality in India.
Acknowledgement:
The author gratefully acknowledges the discussions, debates, and idea exchanges on several occasions with her family members, friends and colleagues on this topic, which helped shape this article.
IMI Insights 
Leave a comment