Assessing the Inclusivity of India's Multi-Tiered GST Regime: A Distributional and Structural Analysis

Abstract

The Goods and Services Tax (GST), which was implemented in India in 2017, was a significant reform in the country's indirect tax regime and was introduced to broaden the tax base and formalize the Indian economy. But its effect on economic equity, that is, whether it is an inclusive tax or imposes a disproportionate burden on lower income groups and small businesses is still a live issue. This paper examines the progressivity of India's multi-layered Goods and Services Tax (GST) regime and its impact on operation of Micro, Small and Medium Enterprises (MSMEs).

This study uses secondary data provided by the Household Consumption Expenditure Survey (HCES), NIPFP datasets, and data from the Ministry of Finance and assesses the extent of compliance using descriptive incidence measures, Multiple Linear Regression and a Chi-Square test for compliance constraints. Higher consumption shares in these two tax brackets are associated with higher upper-income fractals, indicating that the multi-tiered tax structure is progressive across consumer classes. On the other hand, the Chi-Square test shows an imbalance in the burden of operations with a considerable impact of compliance costs on the Micro-enterprise. The paper concludes with policy recommendations for enhancing inclusive taxation through minimizing systemic compliance costs for small-scale operators.