Why is the proposed rate of GST so high in India?

Why is the proposed rate of GST so high in India?

There are two ways the government can tax you:

Tax on your income [direct tax]

Tax on your purchase [indirect tax]


In developed economies, majority of the tax revenues will be direct. Most pay income taxes with very less exceptions.

In India, majority of the tax revenues is indirect although it is getting better over time. Farmers and most others don’t pay income taxes in India. Less than 3% pay income tax.

That leaves the government to make most of their revenue from taxing your purchases that is a little harder to cheat on. Since the government has to pay for a huge number of employees, give subsidy and freebies to everyone and do a little bit of infrastructure and other things, indirect taxes are very high in India compared to most countries. This has always been so.

So much so for the fact that even with a high GST rate, the price of most things are coming down - because the past tax rates for about 26 different taxes were that high.

There is also the question of social justice. Most of us want to tax the rich and not the poor. In developed countries, the governments have higher income tax rates for the rich and not for the poor. Since most pay income taxes, this fairness is achieved just with income taxes. You don’t need to mess with your GST.

In India, the income taxes and other direct taxes are not as big. That means the fairness/equity cannot be achieved just with direct taxes. We need to provide little discounts for the poor [many items are taxed at 0% or 5% or 12%] and then compensate this by taxing the rich [at 28% on luxury and sin items].

However, this need not be for too long. The tax collections have been picking up - especially after the demonetization.

In 2 years the direct taxes might be much more than the indirect taxes [there is a 20 year trend]. That is when the GST can be reduced and be made more simple without too many slabs.

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