How has GST helped to reduce social inequality?

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Published Date:  16-12-2023   Author:   moulik-jain
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The Goods and Services Tax (GST), which went into effect in India on July 1, 2017, was hailed as a revolutionary step forward in tax reform. The purpose of the Goods and Services Tax (GST) is to simplify and ease the complexity of the intricate tax system for both the government and the taxpayers. Examining the impact of the GST on social inequality is crucial, especially in light of the income disparities that exist among the populace, as India marks the fourth anniversary of the law’s implementation.

GST’s impact on socioeconomic inequality must be considered before celebrating its implementation. Critical review is needed to guarantee that the tax reform supports societal goals and India’s economic and social progress.

Simplification and Celebration

When the Goods and Services Tax (GST) was implemented in India on July 1, 2017, the tax system underwent a radical change. For both individuals and businesses, the pre-GST tax structure posed a significant burden due to its intricate framework, which comprised numerous indirect taxes both at the federal and state levels.

GST introduced a simplified, destination-based tax system to lessen this burden. The main goal was to design a tax structure that would facilitate corporate transactions and be more open, effective, and efficient.

A Unified Tax Regime: Simplifying the Tax Structure

The potential of GST to unify a wide range of taxes, from state-level value-added taxes and Octroi to national excise duty and services tax, was one of its main features. The goal of GST was to combine these different levies into a one, smooth tax system that would be used all over the country. By removing the difficulties of juggling several tax jurisdictions, this unification enhanced the coherence of the economy.

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The former origin-based taxation system was replaced by the destination-based approach of the Goods and Services Tax (GST). Under GST, taxes are not dependent on the origin of goods and services, but rather on their eventual destination. This change was made to make corporate compliance easier and lessen the tax system’s cascading effect, which will promote a more open and transparent tax system.

Positive Indicators: Surge in Taxpayer Numbers

The Ministry of Finance announced a significant increase in the number of taxpayers following the introduction of the Goods and Services Tax (GST). This encouraging result indicated that the shift to a more understandable tax system had gone successfully and that both individuals and companies were adjusting to the new structure satisfactorily. The growth in the number of taxpayers also demonstrated increased adherence to the tax code, which aided in the overall success of GST.

The Ministry’s statement of satisfaction emphasized the positive view regarding the potential of GST to simplify the formerly complex tax structure. Even while there would inevitably be difficulties and modifications during the first stages of implementation, the increase in the number of taxpayers offered concrete proof of the good momentum created by GST.

Shifts in Tax Revenue Structure

Even with all of the hoopla around the introduction of GST, the tax revenue structure of the nation has changed significantly. There has been a steady rise in the use of indirect taxes, which are levied on all goods and services. Because indirect taxes are regressive, this change raises worries about the possible escalation of socioeconomic inequality.

Also Read: The Role of GST in Tax Simplification

Direct vs. Indirect Taxes

A detailed analysis of the tax revenue structure in India reveals a significant shift in the proportional contributions of direct and indirect taxes. Direct taxes were the main source of revenue for the 2017–18 fiscal year, accounting for over half of total tax receipts. However, there was a noticeable change, with the percentage progressively dropping to 47% by the 2020–21 fiscal year.

Simultaneously, the contribution of corporation taxes to the total gross tax collection demonstrated a noticeable decrease. The corporation tax share experienced a significant decline, ending at 24% in the financial year 2020–21, from 32% in the fiscal year 2017–18. This change represents an increasing reliance on indirect taxes, a trend that could have an adverse effect of GST social inequality, especially for people with lower incomes.

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Direct Taxes: A Historical Perspective

Income tax, corporation tax, and wealth tax are examples of direct taxes that have historically played a significant role in India’s fiscal environment. In the 2017–18 fiscal year, direct taxes commanded a significant portion of the gross tax collection, exceeding the 50% threshold. This dominance highlighted the importance of progressive taxation in the revenue structure and was a reflection of the significant contributions made by both individual and business taxpayers.

Corporate Tax Conundrum: Shifting Patterns

There was a noticeable change in the course of corporate taxes, which are a subset of direct taxes. Corporate taxes were a major source of revenue for the 2017–18 fiscal year, accounting for 32% of total tax revenue. After that, though, there was a noticeable decline, with the percentage falling to 24% in the 2020–21 fiscal year. Numerous variables, such as shifts in the economy, modifications to corporate profitability, and changes to tax laws, could be responsible for this decrease.

Rise of Indirect Taxes: Implications for Economic Disparities

There has been a noticeable increase in the use of indirect taxes at the same time that direct taxes have become less and less important. The goods and services tax (GST) and excise tariffs are examples of indirect taxes that are intrinsically regressive and affect people in all income groups in GST social inequality. Since lower-income groups are typically disproportionately burdened by indirect taxes, this move may result in an escalation of economic inequality.

The Path Ahead: Balancing Act

India’s tax income system is changing, and this calls for a careful balancing act. Although there is no denying the effectiveness of indirect taxes in raising income, it is crucial to exercise caution to minimize any potential negative effects on the less fortunate. Fostering an inclusive and equitable fiscal environment requires striking a balance between direct and indirect taxes.

Impact on Social Expenditure

The effective distribution of the additional money to social sector spending is critical for the GST to be successful in reducing social inequality. Regrettably, financial allotments to vital areas like health and education show very little growth—or even fall, in many cases. This presents grave doubts regarding the GST revenue’s capacity to improve the lives of the underprivileged.

Budget Allocation Trends

A careful analysis of budget allocations before and after the GST is implemented reveals a complex story and clarifies the dynamics of allocation within important industries. One important component of the public health system, the Ministry of Health and Family Welfare, showed a slight improvement. Before the GST, the allocation was 2.04%; however, in the post-GST era, it slightly increased to 2.21%. Even though this small increase is a good thing, the entire budgetary picture needs to be thoroughly examined.

By contrast, the Ministry of Education, which was given the enormous responsibility of managing primary, secondary, and higher education, saw a worrying reduction in budgetary allocations.

The pre-GST era demonstrated a stronger commitment since the allotment constituted a significant 3.65% of the overall budget. But the post-GST scenario, which has seen a significant contraction to 2.68%, presents a worrying image. This change brings up important issues regarding how educational programs should be prioritized in light of changing budgetary constraints.

Government Programs: Breaking Down Financial Priorities

A deeper examination includes important government initiatives aimed at mitigating social injustices and uplifting marginalized communities. Budgetary support for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), a cornerstone of GST role in social development, was cut. MGNREGA received 2.44% of the Union budget in the pre-GST era; in the post-GST environment, this percentage decreased to 2.10%. This decrease suggests that maintaining and growing vital programs meant to support rural lives may present difficulties.

In the same vein, funding for the National Health Mission, a mainstay of healthcare delivery, was correspondingly reduced. It received 1.2% of the Union budget in the pre-GST era, but in the post-GST scenario, that amount dropped to 1.1%. The consequences of lower funding for health-related programs during a global health emergency demand a thorough assessment of how well-suited the budgetary system is to changing GST role in social development.

Post-GST Challenges: Balancing Social Priorities

Although the GST has simplified the tax structure, it has made it more difficult to uphold strong fiscal promises to vital industries. The imbalance between little increases in health spending and significant cuts to education and other important government programs highlights the need for a reevaluation of fiscal policy.

  • Navigating post-GST fiscal reality necessitates striking a balance between economic imperatives and the imperative to redress social inequities.
  • One of the main goals of the GST’s establishment was to simplify tax structures and promote a more uniform and simple system. The effect on the financial allotments for vital industries, however, has been a complicated mosaic.
  • A detailed examination presents a picture in which health spending saw little increase and education and other government programs saw significant decreases.
  • The Ministry of Health and Family Welfare, which is tasked with the enormous responsibility of protecting the health of the country, saw a slight increase in funding. Allocations went from 2.04% in the pre-GST period to 2.21%, a modest increase.
  • Despite being a welcome development, this slight increase emphasizes the careful balancing act needed to fulfill the growing demands on the healthcare system.
  • By comparison, there has been a worrying downturn in the Ministry of Education, which is responsible for GST role in social development and the country’s intellectual capacity through basic, secondary, and university education. Budgetary allotments fell to a depressing 2.68% from 3.65% in the pre-GST era.
  • The importance of prioritizing educational activities in the post-GST fiscal picture is called into question by this significant decline. Furthermore, fiscal assistance for important government initiatives that were crucial for resolving socioeconomic gaps was cut.
  • A pillar of rural life, the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) suffered a reduction in its portion of the Union budget from 2.44% in 2016–17 to 2.10% in 2021–22. A similar decline was seen in the National Health Mission, which went from 1.2% in 2016–17 to 1.1% in 2021–2022.

The fiscal landscape following the GST social inequality is characterized by a careful balancing act between the need to fulfill social objectives and economic needs. Finding this balance becomes crucial to overcoming the difficult obstacles presented by a changed tax system. It demands a calculated strategy that matches budgetary measures to the changing demands of a changing society.

Challenges Amidst a Pandemic

The COVID-19 pandemic’s unrelenting onslaught has brought forth hitherto unheard-of difficulties and thrown a long and menacing shadow on the state of the economy. During the first wave, the introduction of strict lockdown measures caused a seismic spike in the rate of poverty.

  • According to shocking statistics, 230 million people are thought to have fallen into extreme poverty, indicating the urgent need for targeted solutions.
  • Economic disruptions brought on by lockdowns have amply demonstrated the necessity of increased investment in three critical areas: education, health, and livelihood.
  • The epidemic forces a reevaluation of financial priorities by serving as an unforgiving stress test for the durability of the country.
  • A thoughtful and flexible financial approach is necessary given the pressing need to protect educational programs, strengthen healthcare facilities, and increase livelihood chances.

However, there are many obstacles in the financial world. Revenue collection has suffered greatly as a result of the frequent lockdowns, necessitating a delicate balancing act. It becomes clear that finding the correct balance between producing more resources and lessening the pandemic’s negative effects on society is a difficult undertaking. Due to the confluence of social unrest and economic hardship, creative fiscal solutions that tackle both short-term needs and long-term resilience are required.

Also Read: The Impact Of GST On The Post-COVID Indian Economy

Conclusion

Analyzing the GST social inequality is crucial as India looks back on the last four years of its implementation. Even while the country’s tax system has changed significantly as a result of the GST, there is still reason to be concerned about the possibility that these changes could worsen economic inequality. The transition to indirect taxes necessitates a calculated approach to social sector spending to guarantee that the less fortunate groups in society gain from the higher revenue. Maintaining social welfare while implementing economic reforms must be balanced to promote a more egalitarian India.

FAQs

  • What Has GST Done To Reduce Social Inequality In India?

GST simplified the tax system to make it more clear and accessible, decreasing social inequalities by providing a fair and unified tax system.

  • What Was The Goal Of GST in India?

In July 2017, India implemented GST to simplify the complex tax system by consolidating 17 taxes into one, unified framework that was easier for the government and people to manage.

  • How Did GST Simplify Corporate And Personal Taxes?

GST abolished the complicated pre-GST tax regime that burdened businesses and people. The new destination-based tax system sought transparency, efficiency, and effectiveness.

  • What Function Did GST Serve In Uniting National Taxes?

GST aims to unite state-level value-added taxes and national excise duty into a unified, streamlined tax structure to improve economic coherence in India.

  • What Encouraging Signs Emerged After GST?

The Ministry of Finance reported a considerable rise in taxpayers post-GST, indicating good adaptation to the new tax structure and increased tax code compliance.

  • How Did Gst Affect National Tax Revenue?

The percentage contributions of direct and indirect taxes changed, with indirect taxes rising. This highlighted worries about socioeconomic disparity due to indirect taxes’ regressivity.

  • What Were Direct Taxes Contributions Before GST?

In the 2017–18 fiscal year, direct taxes—income, corporate, and wealth—accounted for over 50% of gross tax collection before GST.

  • Why Did GST Lower Business Taxes?

Corporate taxes fell, potentially due to economic developments, corporate profitability changes, and tax code changes.

  • What Are Some Of The Major Impacts Of Indirect Tax Rise On Economic Disparities?

Since indirect taxes like GST and excise tariffs affect all income categories equally, they disproportionately penalize low-income groups, raising concerns about economic inequality.

  • What Obstacles Does India Face In Balancing Social Priorities Post-Gst, Especially During Covid-19?

Post-GST fiscal conditions make it difficult to finance health and education. A balanced approach to short-term requirements and long-term resilience was illustrated by the COVID-19 pandemic.

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Moulik Jain

I am a seasoned marketer specializing in Tax, Finance, and MSMEs who brings a wealth of hands-on experience to demystify complex subjects, providing insightful guidance for entrepreneurs and finance enthusiasts alike.

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