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THE EQUITY-COMPLEXITY TRADE-OFF IN TAX POLICY: LESSONS FROM THE GOODS AND SERVICES TAX IN INDIA
Published online by Cambridge University Press: 14 August 2023
Abstract
Developing countries often rely on consumption taxes, because these are broad, easy to administer, and harder to evade. However, the taxation system becomes inherently regressive. To counter this problem of the regressive nature of consumption taxes, there is a temptation among policymakers to address equity concerns through a multiplicity of rates, making the consumption tax system complex. Here, complexity is considered the by-product, or companion, to pursuing goals of equity. Complex tax systems, however, pose a different problem relating to equity. Assuming a minimum fixed cost of compliance imposed by a complex tax system, smaller firms and individuals face a much higher cost of compliance relative to larger firms and richer individuals. Oligarchic sectors dominated by a few large firms also find it easier to organize and lobby to get favorable rates compared to competitive sectors with small firms. Though complexity is considered a by-product of several equity-enhancing measures, the Indian experience with its Goods and Services Tax reform serves demonstrates the opposite, that there is a trade-off between equity and complexity.
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- © 2023 Social Philosophy & Policy Foundation. Printed in the USA
Footnotes
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Mercatus Center, George Mason University, srajagopalan@mercatus.gmu.edu. Competing Interests: The author declares none. I would like to thank the other contributors to this volume for their comments and feedback, the reviewers, and David Schmidtz.
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41 Notification on June 2, 2021 [Notification No. 01/2021 – Central Tax (Rate)].
42 Notification on June 14, 2021 [Notification No. 05/2021 – Central Tax (Rate)].
43 Notification on September 30, 2021 [Notification No. 06/2021 – Central Tax (Rate)].
44 Notification on September 30, 2021 [Notification No. 07/2021 – Central Tax (Rate)].
45 Notification on September 30, 2021 [Notification No. 08/2021 – Central Tax (Rate)].
46 This change clarified the confusion over what rate would apply for carbonated fruit juices since fruit juices are levied with 12% GST and carbonated/aerated drinks are levied with 28% GST.
47 Notification on September 30, 2021 [Notification No. 11/2021 – Central Tax (Rate)].
48 Notification on September 30, 2021 [Notification No. 12/2021 – Central Tax (Rate)]. Rate reductions for COVID-19 relief measures in effect till December 21, 2021
49 Notification on July 13, 2022 [Notification Nos. 03/2022 – Central Tax (Rate)].
50 Notifications on July 13, 2022 [Notification Nos. 06/2022, 07/2022, 08/2022 – Central Tax (Rate)].