Appendix I. Methodology
The main elements of the methodology are laid out below.
The GST subsumes central taxes (central excise, central service tax, counter-vailing duty, special additional duty, and additional surcharges and cesses), and state taxes (state VAT, central sales tax (levied by states), luxury tax, entertainment tax, entry tax, advertisement tax, purchase tax, and lotteries and gambling taxes).
With available information on the key pre-GST rates (in italics above), the pre-tax weight for goods and services in household consumption as reported in the NSS data (which is gross of pre-GST indirect taxes) is calculated. Item-wise GST rates are then mapped to these consumption weights, to calculate the effective GST rate for each household.
The effective rate includes both a direct incidence (weighted sum of non-exempt goods and services’ tax rates), and an indirect incidence (weighted sum of embedded input tax costs in exempt goods and services, which are not input-tax creditable, and thus are assumed to pass on fully to consumer prices, except for electricity and water).
The indirect incidence is estimated using input-output information, applying Leontieff-inverse coefficients to weight the share of a given input good/service in the output of a given (exempt) good/service. Goods excluded from the GST (such as fuels) are also treated as an exempt good for this exercise.
Revenue-neutral scenarios are then assessed on the same household consumption data by applying alternative tax (GST) rates on the goods and services, mapping as closely as possible to the items listed under the GST and the items recorded in household consumption expenditure.
Household consumption expenditure: NSS 66th Round Consumption Expenditure Survey (2011–12), with more 100,000 households covering nearly 350 goods and services.
Rates of center and state taxes subsumed by GST, rates on GST: central and state government documents (World Bank), GST website.
Input structure of the Indian economy: Input-Output Tables of the Indian Economy 2007/08.
Concordance between rate schedules, consumption expenditure classification, and input structure classification: staff estimates.
Barbone, L., R. Bird, and J. Vazquez-Caro, 2012, “The Costs of VAT: A Review of the Literature,” International Center for Public Policy Working Paper 12–22
Government of India, 2015, Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax, http://www.gstcouncil.gov.in/sites/default/files/CEA-rpt-rnr.pdf.
Owens, J., P. Battiau, and A. Charlet, 2011, “VAT’s Next Half Century: Towards a Single-rate System?” OECD Observer, 284, Q1 2011.
Sundaram, K. and S. Tendulkar, 2001, “Recent Debates on Database for Measurement of Poverty in India: Some Fresh Evidence,” Delhi School of Economics.
Gupta, P., F. M. Blum, D. Jain, S.R. John, S. Seth, and A. Singhi, 2018, India Development Update: India’s Growth Story (English), Washington, D.C.: World Bank Group.
Prepared by Adil Mohommad.
Source: World Bank India Development Update 2018.
“The regressivity of the compliance burden, especially for VATs, stems from the large diseconomies of scale involved in complying with tax requirements, together with the learning curve effect that militates strongly against small firms…” (Barbone et al. (2012)).
That said, it is noteworthy that since its implementation the GST rate structure has been streamlined to an extent, with most of items being moved out of the top 28 percent bracket (which would reduce the progressivity of the tax).
Estimates of the incidence in this Section are based on household consumption expenditure survey data, which yields lower GST standard rates than have been estimated using other data sources. For instance, see Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (GST) (December 2015), which shows estimates ranging from 11.6 percent to 17.7 percent for the revenue neutral rate.
For debates regarding the appropriateness of NSS data for setting the poverty line, see Sundaram and Tendulkar (2001) for instance.
According to the 2016 Economic Census of India, there are 58.5 million establishments in operation, of which 45.4 million are in non-agriculture (including the public sector). Currently 10.4 million firms are registered, of which 1.3 million are under the “composition scheme” (availing the flat tax but not the input tax credit).