GENDER AND TAXATION: INCIDENCE OF INDIRECT TAXES
PINAKI CHAKRABORTY
LEKHA CHAKRABORTY
KRISHANU KARMAKAR
May 2009
NATIONAL INSTITUTE OF PUBLIC FINANCE AND POLICY
NEW DELHI – 110 067
Preface
This study has been undertaken at NIPFP in collaboration with University of Kwazulu-Natal,
South Africa and American University, Washington DC. The research team for the study was led
by Pinaki Chakraborty; & Lekha Chakraborty.
The Governing Body of the Institute does not take any responsibility for the contents of this
study; it belongs to the authors only.
M. Govinda Rao
Director
Gender and Taxation: Incidence of Indirect Taxes
1.
Introduction
The standard principle of public finance suggests that in the process of development, the
tax structure should move from indirect to direct taxes and within direct taxes it should move
from corporate tax to income tax and, in case of indirect taxes, it should move from foreign trade
taxation to domestic indirect taxation (see Ahmed and Stern: 1991, Newbery and Stern: 1987).
However, historically, it has been noted that “dependence on indirect taxes, particularly taxes on
domestic trade, is however, greater in India than in many other countries at similar levels of
development and, contrary to the trend observed in other countries, the transition of tax structure
associated with economic development (Hinrichs: 1966) has not come about even after
significant increase in the levels of income and shifts in the structure of the economy over the
past four decades.” (Bagchi: 1997, pp-104-105). It has also been noted that “the fundamentals of
Indian tax structure have changed little since the Government of India Act in 1935 set out the
basic assignments of revenues and responsibilities to the centre and the states. The assignments
were subsequently embodied in the Indian Constitution of 1947. However, in terms of the
relative importance of the sources of revenue, there have been important changes. For example,
land revenue has declined almost to the point of insignificance and the salt tax has been
abolished, whilst excises, sales taxes and customs duties have increased greatly” (Burgess and
Stern: 1994, pp-44). Also, in the post reforms period since 1990s, the share of direct taxes in
total tax has been increasing steadily.
India has a very complicated tax structure. In a three-tier federal fiscal system, Seventh
Schedule of the Constitution has divided the tax power between centre and states. As per the
assignment of taxes, different taxes collected by the Union government are commonly known as
the Central taxes that can be further classified into the Direct and Indirect taxes. The main
components of the Direct Central Taxes are the Personal Income Tax and the Corporate Income
Tax1. The Customs duties and Excise duties are the major indirect taxes collected by the Union
government. On the other hand, the States collect taxes mainly in the form of Sales tax (now
1
The direct taxes virtually have lost its relevance at the state level.
1
VAT), State Excise duty on liquor, Stamps and Registration Fee, Taxes on Transport and other
minor taxes. The central government also has the power of taxing services. But the service tax is
introduced on a standalone basis and is not integrated with the goods tax. The Central
Government and the all the state governments together are contemplating introduction of
integrated Goods and Services Tax (GST) from the fiscal year 2010-11, which should change the
structure of taxation in India on a permanent basis. Apart from the central and state level taxes,
there are few revenue sources that are with the local governments, mainly property taxes,
entertainment tax and other minor taxes. However, the share of local taxes in the combined
revenues of all levels of governments is negligible.
If we look at the recent history of taxation in India, the Central government undertook
major tax reform programme since 1991 and states have also followed subsequently by
introducing rapid reforms in indirect taxes by replacing the origin based sales tax system by
destination based value added tax in 2005. These reform measures are structural in nature and
have considerably influenced the tax structure and revenue mobilization at the central level, and
have the potential to do so at the state level. Initial indications suggest that rapid reform in state
level consumption taxes have resulted in higher revenue mobilization and helped removing
certain distortions in the consumption tax system.
In this backdrop we evaluate the level of taxation in relation to GDP. The long run trend
in tax-GDP ratio shown in figure 1 taking both central and all the state governments together
revealed that the combined tax ratio, which was little more than 5 per cent of GDP during 1 st half
1950s, increased to more than 16 per cent of GDP during the mid 1980s. With the introduction of
rapid tax reforms during the economic reforms during the 1990s, though resulted in a decline in
the tax to GDP ratio, it started showing an increasing trend from the early 2000 reaching to the
mid 1980 level.
2
20
15
10
5
0
19
50
-5
19 1
54
-5
19 5
58
-5
19 9
62
-6
19 3
66
-6
19 7
70
-7
19 1
74
-7
19 5
78
-7
19 9
82
-8
19 3
86
-8
19 7
90
-9
19 1
94
-9
19 5
98
-9
20 9
02
-0
3
(Per cent to GDP)
Figure 1: Tax to GDP Ratio: 1950-51 to 2004-05
Direct
Indirect
Total
It is also to be noted that the decline in tax-to GDP ratio was primarily due to the fall in
central revenues due to the fall in both the customs duty and Union excise duty. However, during
the 1990’s, the direct tax effort increased sharply. It should be noted that as Indian tax structure is
heavily dependent on the indirect taxes2, the increase in the direct tax revenue effort could not
compensate the resultant revenue loss arising out of the decline in the tax effort of the indirect taxes.
While commenting on government’s excessive dependence on indirect taxes to mobilise
resources, Burger and Stern (1994) noted that excise, sales and customs ‘taken the strain’ and in
the process an adhoc structure has arisen with new goods being brought into the tax net and rates
on certain goods being increased in response to the pressure on revenues3.
In case of indirect taxes, significant reform is the introduction of VAT in the fiscal year
2005-06 by 21 states. Now except, Uttar Pradesh, all other states have introduced Value Added Tax.
2
"Heavy reliance on indirect taxation is not unusual for a country in the early stage of development. Low levels of income
of the majority of the people, inadequate spread of accounting practices and tax evasion have severely restricted realisation
from income tax. In this situation, the government has little option but to have recourse to indirect taxation to raise
resources for development. Growth of industrial production and expansion of trade have also provided scope for
mobilising resources through commodity taxes on production and trade." (LTFP:1985, p.22)
3
“On average, developing countries obtain the bulk of their revenue from (i) domestic taxes on goods and services (5 % of
GDP and 30 % of tax revenue-partly from taxes on sales and partly from excises), (ii) foreign trade taxes (5 % of GDPmainly import duties) and (iii) income taxes ( 6 % of GDP-mainly on corporations). In contrast, the three big sources of
government revenue in industrial countries are (i) income taxes (11 % of GDP and 36 % of tax revenue-mainly on
individuals), (ii) domestic taxes on goods and services (9 % of GDP and 28 % of tax revenue-mainly on sales) and (iii)
social security contributions (9 % of GDP). It must be recognised that whilst these figures portray an average, there is a
great deal of variation across countries in both the level of tax and non-tax revenue and the balance within and between
them” (Burgess and Stern: 1994, pp.48-49).
3
The VAT is the only alternative to the current system of sales taxation, which apart from
cascading of tax through production of inputs, creates economic distortions through multiple tax
rates, selective exemptions and incentives. A proper design of VAT is critical to achieve the
desired outcome of value added taxation. As per the consensus achieved among the states,
recommended VAT rates are three, viz., 1 per cent, 4 per cent and 12.5 per cent. While, the 1 per
cent rate is applicable to jewellary, the 4 per cent rate is applicable to inputs and some items of
basic necessities, the 12.5 per cent rate is the general rate applied to residual commodity group.
While exports are zero rated, each state is given the flexibility to exempt few goods of local
importance from VAT. Four commodities, viz. Liquor, Petrol, Diesel and Aviation Fuel are kept
outside the VAT and the floor rates for these commodities are 20 per cent. Also, Textile,
Tobacco and Sugar are not taxed by the states but an additional excise duty of 4 per cent imposed
on these items by the central government and revenues accrued are shared with the states under
tax rental arrangement.
In this paper we examine the incidence of VAT on consumption to find out the gender
differential incidence of consumption taxes across households based on the data obtained from
the 61st round of the National Sample This survey is conducted in India; at spatially
disaggregated level in every five years. Gender based tax incidence analysis can be used to
examine the distributional impact of taxes by taking into account intra-household relations.
Gender incidence analysis, as with burden analysis, require assumptions based on limited data,
but can nevertheless is a useful exercise4. We examine the VAT incidence for a specific state,
viz., West Bengal.
2.
Indirect Tax Incidence
As mentioned earlier, although there are a spectrum of indirect taxes imposed by both
central and the state governments, we focus our attention on the incidence of consumption tax
levied by the states5. Consumption tax or VAT constitutes the single largest source of revenues at
the state level constituting more than two-third of the own tax revenues of the state. We have 28
4
http://gender.sm.ee/index.php?197973650
5
As per the 7th schedule of the Constitution, taxes on consumption are with the state governments.
4
state governments and 7 centrally administered union territory having an independent tax system
and administration, and also consumption pattern and the level of taxation measured in terms of
tax to GDP ratio differs widely across states. Give these differences; it would be ideal to examine
the level of incidence of taxes in each of them separately. We focused on one of the
representative states, namely, West Bengal for the purpose of our analysis of consumption tax
incidence.
West Bengal is a middle income state with a very low tax to GSDP6 ratio. As evident
from the Figure 3, compared to many other states of similar levels of development, West
Bengal’s tax ratio is lower at little more than 4 per cent of GSDP when the average tax ratio for
all the states together is around 7 per cent (See Figure 3). The tax structure given in Figure 4 also
reveals that VAT constitutes the single largest share of own tax revenues for the state (59 per
cent). Prior to the introduction of VAT in 2005, consumption tax in the form of sales tax had 15
different rates ranging from 1 to 20 per cent. But with the introduction of VAT, these rates have
been rationalised and consolidated into 3 basic rates, viz. 1 per cent, 4 per cent and 12.5 per cent
and exports are zero rated. The character of the goods falling under different categories of VAT
rate and used for the incidence analysis is given in Table 5. As evident from the Table, basic
food items, viz., cereals and vegetable, basic clothing, domestic services, basis stationary and
books are exempted from VAT. Food items, other than basic, are taxed at 4 per cent and the rest
of the category is taxed at the general rate of 12.5 percent. As mentioned earlier, like other states
in India, West Bengal also has a list of exempted commodities, which are treated, as goods of
local importance and exempted from VAT. There are 170 items that are exempted from VAT
including those that are goods of local importance.
6
GSDP is the Gross State Domestic Product or the state income.
5
Table 1: Nature of Commodities and the Applicable VAT Rate
Tax Rate
Number of Goods under VAT
Nature of Goods
Exempted
170
Basic Food Items like Cereals and Vegetables, Basic Clothing, Domestic
Services, Basic Stationary and Books,
1%
3
Jewellery and Ornaments
4%
79
Food Items other than basic, Household Goods, Medicine etc.
12.50%
81
Some Beverages, Some Electronic Goods, Some Medical Equipments and
Expenses, Household Goods which can be classified as luxuries
Source: Commercial Taxes Department (Government of West Bengal)
Figure 2: State Level Tax to GDP Ratio: 2005-06
12.0
Karnataka
Tamil Nadu
(Per cent to GSDP)
10.0
8.0
Andhra Pradesh
Goa
Chhattisgarh
Hary ana
Maharashtra
Kerala
Gujarat
Madhy a Pradesh
6.0
4.0
Punjab
Rajasthan
Orissa
Jharkhand
Bihar
2.0
0.0
Figure 3: The Structure of West Bengal Tax Revenues: 2005-06
Electricity Duty
4%
Tax es on Vehicles
Other Tax es
Stamp & Registration
14%
11%
5%
Ex cise
7%
VAT
59%
6
Uttar Pradesh
West Bengal
Another issue in VAT design needs mention here is that there are selected items currently
under sales tax kept outside the VAT and taxed differently at a higher rate. These items are
diesel, petrol and aviation turbine fuel (ATF), crude oil and liquor (See Table 6). Floor rates for
all these taxes are 20 per cent for all the states. In West Bengal except for petrol and diesel which
are taxed at 25 per cent, non-vatable commodities are taxed at the floor rate of 20 per cent.
Table 2: Tax Rate on Commodities Outside the VAT
Item
Tax Rate*
Country liquor
20.00
Beer
20.00
Foreign liquor or refined liquor
20.00
Petrol
25.00
Diesel
Source: Commercial Taxes Department
(Government of West Bengal)
25.00
Exclusion of services, from the VAT base is another major weakness of the evolved VAT
design. Exclusion of services from the base, even if the states are empowered to tax selected
services on a standalone basis, would not eliminate the problem of cascading from the tax system
(Rao: 2004). It also discriminates goods against services and has given rise to serious problems
in separating out the service component in sale of goods taking place in several instances, e.g., in
the case of execution of works contracts, services of food in restaurants and so on (Bagchi:
1997).
Given this background, we examine the incidence of VAT on consumption expenditure
of West Bengal to find gender differential tax incidence. Gender concerns in a limited way can
be implemented through differential tax rates on commodities and exemptions of certain
commodities (necessities) from VAT. This can help in neutralizing the implicit gender bias of
commodity taxes. However, it should be taken note of that gender relation within the household
and its decision making process also plays an important role in determining whether such a
policy to neutralize gender bias will be successful. For example, a higher tax on a non-necessity
like alcohol may not reduce the real consumption of alcohol rather lead to a reduction in the
share of income allocated for the consumption of necessity items. Similarly, an exemption from
7
tax of necessary commodities may lead to the allocation of a greater share of income for the
consumption of non-necessities instead of hiking the consumption of necessities in case the
gender relations in household decision making process is not very progressive.
As a starting point to this analysis, apart from analysing the tax incidence in aggregate,
we have examined the gender differential consumption pattern across households and thereby the
tax incidence across different categories of households in terms of headship and household
composition and thereby the progressivity or regressivity of the tax system. We have also
examined the rural and urban households separately. This has resulted in three different sets of
estimates – One set for the aggregated for the state and the other two for the urban and rural subsamples respectively. We think, a priori the rural and urban households will have different
expenditure pattern and thereby tax incidence. This can only be analyzed if we consider the
urban and rural sub-samples separately as separate entities. As Indian economy is predominantly rural and more than two-third of the total population lives in rural India, with
subsistence agriculture as the livelihood for majority of them, it is important that we analyse
urban and rural sector separately. However, we have not been able to do the tax incidence
according to the employment status of the households, as consumer expenditure survey does not
give data on employment status of households. Employment survey is conducted separately and
the consumption expenditure survey data cannot be mapped against the employment survey data.
We have used the data obtained from the 61st round National Sample Survey of
consumer expenditure. For our purpose, we have taken sub-sample combined estimates based on
all rounds. The survey collects data on household characteristics, demographic details of the
household and household level expenditure on almost 400 items. For some frequently purchased
items the expenditure data are collected for a 30 days reference period, for the non-so-frequently
purchased items the data is collected for both a 30 days and a 365 days reference period. While
for certain items data about both quantity and value are collected for others only values are
collected. Finally, for consumer durables only the 365 days, reference period is used. Moreover,
for certain items, especially food articles, both home production and total consumption data are
collected.
8
A note of caution on household consumption expenditure data may be in order. The
household consumption expenditure data have their limits for tax analysis, particularly for taxes
on intermediate consumption (Rajemison and Younger: 2003) and existing studies have
restricted themselves to taxes on final demand or make strong assumption about the incidence of
taxes on inputs (Younger et. al; 1999, Sahn and Younger 1998, Bird & Miller, 1989). In this
study also we consider taxes on final demand. Our sample consists of 7877 households from
West Bengal - both urban and rural. In the tables we report the mean tax incidence figures for the
households in each quintile.
An aggregate picture of tax incidence is important before one deals with the gendered
classification of households and tax incidence thereon. The aggregate picture for rural, urban and
combined is given in Table 3. It is evident from the table that tax incidence falls more on the
poorest quintile vis-à-vis richer quintiles when we look at the combined incidence taking both
rural and urban households together. However, the degree of regressivity in terms of incidence is
much higher in urban households vis-à-vis rural households. In the rural households, the tax
incidence, though falls more on the poorest expenditure quintile vis-à-vis other quintiles; the
level of incidence is much lower than the urban households. Another point that emerges from the
Table 3 is that VAT incidence is higher than the incidence of fuel levy and excise. Also, unlike
excise, fuel levy appears to be progressive. The incidence of fuel levy goes up with the
expenditure quintile. Fuel levy includes fuel levy for household fuel as well as well as fuel for
transport. We would see in subsequent discussion, the incidence of household fuel is again
regressive.
9
Table 3: Incidence of Consumption Tax Across Quintile in Rural and Urban and
All Households in West Bengal
(In Per cent)
Total
Quintiles
Total tax
VAT
Excise
Fuel Levy
1st
1.37
1.2750
0.0397
0.0002
2nd
0.58
0.5356
0.0198
0.0026
3rd
0.48
0.4373
0.0128
0.0045
4th
0.52
0.4848
0.0113
0.0118
5th
0.69
0.6171
0.0121
0.0507
Rural
1st
0.83
0.7454
0.0311
0.0003
2nd
0.42
0.3905
0.0189
0.0004
3rd
0.40
0.3635
0.0120
0.0032
4th
0.41
0.3844
0.0093
0.0082
5th
0.49
0.4307
0.0080
0.0458
1st
2nd
3.89
1.33
3.7510
1.2477
0.0799
0.0241
0.0000
0.0131
3rd
0.79
0.7441
0.0164
0.0102
4th
0.78
0.7345
0.0164
0.0206
5th
0.84
0.7619
0.0152
0.0545
Urban
Incidence of tax by gender of the head of the household and household sex composition
is given in Table 4. Households are classified in five different categories, viz., male headed,
female headed, with more number of male (male dominated), with more number of female
(female dominated) and male and female equal in number. As evident from the Table, when we
look at the incidence based on household headship, aggregate incidence of tax is higher in case
of female headed households compared to male headed category. In this classification of
households, incidence of excise and fuel levy is more in the case of male headed households visà-vis female headed households.
The incidence based on household sex composition shows a different picture. As evident
from Table 4, aggregate tax incidence is highest in the case of male dominated households,
followed by households with equal number of male and female and lowest level of incidence is
for female dominated households. The incidence (as per the household categorization of Table
10
4) separately for rural and urban India is given in Table 5. When we look at the incidence based
on household headship, in urban India, male headed households bear the higher incidence of tax
vis-à-vis female headed households. However, in rural India, incidence is higher in case of
female headed households vis-à-vis male headed households. In all the categories, VAT is the
predominant tax.
Table 4: Overall Incidence by Household Types
Number of
Excise Tax Fuel Tax Households
Total Tax
VAT
2.079
(1.312)
2.12
(1.071)
1.901
(1.174)
2.021
(1.02)
0.045
(0.209)
0.027
(0.106)
0.059
(0.312)
0.024
(0.169)
2.237
(1.612)
1.945
(0.949)
2.011
(1.036)
2.035
(1.473)
1.808
(0.847)
1.851
(0.888)
0.054
(0.279)
0.034
(0.121)
0.037
(0.141)
0.067
(0.349)
0.045
(0.239)
0.052
(0.287)
Headship
Male headed
Female headed
Household Sex Composition
Male-dominated
Female-dominated
Equal # females & males
Note: Standard Errors in brackets
7066
821
3282
2552
2043
Table 5: Overall Incidence by Household Types by Rural Urban
URBAN
Total Tax
2.975
Male headed
(1.778)
2.759
Female headed
(1.181)
Household Sex Composition
Male-dominated
Female-dominated
Equal #
3.333
(2.171)
2.547
(1.135)
2.767
(1.215)
VAT
RURAL
# of
Excise Tax Fuel Tax Households
Total Tax
VAT
# of
Excise Tax Fuel Tax Households
2.69
(1.641)
2.645
(1.146)
0.117
(0.373)
0.049
(0.158)
Headship
0.112
2540
(0.415)
0.056
349
(0.251)
1.743
(0.876)
1.816
(0.863)
1.605
(0.751)
1.724
(0.798)
0.017
(0.074)
0.017
(0.066)
0.040
(0.261)
0.009
(0.108)
Urban
3.02
(2.062)
2.362
(1.026)
2.493
(1.004)
0.138
(0.477)
0.080
(0.192)
0.095
(0.239)
0.113
(0.433)
0.074
(0.292)
0.128
(0.442)
1.777
(0.998)
1.731
(0.768)
1.731
(0.797)
1.621
(0.848)
1.612
(0.673)
1.613
(0.707)
Rural
0.019
(0.077)
0.017
(0.075)
0.016
(0.066)
0.048
(0.305)
0.035
(0.217)
0.024
(0.195)
1277
907
706
4516
472
2006
1645
1337
This categorisation although gives gendered classification of households and
corresponding tax incidence, it does not throw much light on the nature of incidence. In order to
know whether a tax system is progressive or regressive, we need to relate the level of incidence
with the level of income or consumption. As mentioned earlier, due to the absence of reliable
11
data on income we have tried to see the level of incidence with the level of consumption. The
quintile-wise tax incidence based on the sex composition and presence of children is given in
Table 6. The tax incidence is evidently regressive, with the poorest quintile of “Male dominated
without Children” category showing the highest level of incidence. When we look at the ‘Male
dominated with children’ category, the incidence is highest in the richest quintile although, the
poorest quintile has higher tax incidence vis-à-vis middle quintiles. In other words, the tax
incidence of quintile wise categorisation by sex composition
reveals that male dominated
households has relatively higher tax incidence compared to female dominated households across
all quintiles. Further, in male dominated category, q1 bear the highest tax incidence, while the
incidence is highest for q5 in female dominated category (table 6 and 7). The overall incidence
for male dominated households revealed a U-shaped pattern with incidence highest in q1 (2.96)
declining to 1.75 in q2 and 1.77 in q3 and then increasing to 2.78 in q5; while female dominated
households revealed a progressive incidence pattern with q1 lowest incidence at 1.67 and q5
with highest incidence at 2.69.
It is important to examine how the tax burden is distributed across quintile in terms of
different commodity groups (See Table 7), as per the household categorization spelt out earlier.
In aggregate, taking all the commodities together, for all households, tax incidence is much
higher in the case of lowest expenditure quintile. However, if we look at the specific
commodities, higher tax incidence for the lowest expenditure quintile arises primarily due to the
high incidence of taxes on the items of basic necessities and on intoxicants, viz., food, clothing
and footwear, fuel, tobacco and alcoholic and non-alcoholic beverages. It is also evident from
the Table 7 that highest expenditure quintile bears the highest incidence of tax when it comes to
housing, water, electricity and gas and also health care and medicine and fuel and transport.
However, the tax incidence is noted highest for q4 and q5 of Equal # Females Males
Households at 2.184 and 2.944 respectively. Within the subcategories, tax incidence related to
meals out is found to be significantly higher among q1 of male dominated households ; while tax
incidence related to basic food, medical expenses and clothing are the highest among the q1 of
female dominated households. The significant result from the disaggregate analysis is that the tax
12
incidence related to basic food, clothing and medical expenditure is higher for female dominated
households than male dominated households across all quintiles.
Table 6: Incidence by sex composition, presence of children, and quintile.
Tax as a percentage of post-tax expenditure. (Standard Errors in brackets)
Quintile Total Tax
VAT
Excise Tax Fuel Tax
Male dominated WITH children
1.785
1.681
0.009
1
(0.101) (0.101)
(0.002)
1.542
1.441
0.012
2
(0.028) (0.025)
(0.002)
1.692
1.546
0.014
3
(0.033) (0.027)
(0.003)
1.92
1.801
0.039
4
(0.038) (0.034)
(0.006)
2.593
2.208
0.102
5
(0.052) (0.042)
(0.011)
1.904
1.733
0.036
Total
(0.022)
(0.02)
(0.003)
Female dominated WITH children
1.525
1.465
0.007
1
(0.036) (0.034)
(0.001)
1.617
1.524
0.008
2
(0.032) (0.029)
(0.002)
1.619
1.539
0.009
3
(0.03)
(0.028)
(0.002)
1.911
1.777
0.031
4
(0.04)
(0.034)
(0.005)
2.569
2.268
0.101
5
(0.047)
(0.04)
(0.009)
1.857
1.721
0.032
Total
(0.019) (0.017)
(0.003)
Equal # Females Males WITH children
1.488
1.308
0.015
1
(0.061) (0.032)
(0.005)
1.529
1.461
0.008
2
(0.036) (0.034)
(0.001)
1.696
1.603
0.012
3
(0.041)
(0.04)
(0.002)
1.895
1.811
0.025
4
(0.047) (0.043)
(0.006)
2.593
2.293
0.081
5
(0.073) (0.056)
(0.012)
1.828
1.694
0.026
Total
(0.026) (0.021)
(0.003)
0.001
(0.001)
0.001
(0.004)
0.007
(0.004)
0.031
(0.011)
0.251
(0.026)
0.058
(0.007)
0.0003
(0.0003)
0.0005
(0.0007)
0.005
(0.0035)
0.048
(0.012)
0.165
(0.018)
0.045
(0.005)
0.001
(0.001)
0.003
(0.003)
0.001
(0.001)
0.022
(0.01)
0.202
(0.031)
0.042
(0.007)
# of HHs Quintile Total Tax
222
389
484
525
571
2191
248
365
393
456
530
1992
138
241
269
274
269
1191
VAT
Excise Tax Fuel Tax
Male dominated WITHOUT children
4.32
4.002
0.145
0.001
1
(0.191)
(0.184)
(0.046)
(0.001)
2.353
2.23
0.022
0.022
2
(0.172)
(0.154)
(0.007)
(0.027)
2.00
1.827
0.027
0.054
3
(0.103)
(0.092)
(0.01)
(0.037)
2.301
2.15
0.058
0.023
4
(0.078)
(0.073)
(0.01)
(0.013)
3.118
2.639
0.158
0.298
5
(0.08)
(0.063)
(0.019)
(0.039)
2.97
2.7
0.093
0.086
Total
(0.069)
(0.064)
(0.013)
(0.013)
Female dominated WITHOUT children
1.92
1.835
0.034
0.0004
1
(0.081)
(0.08)
(0.007)
(0.0004)
2.028
1.936
0.004
0.0008
2
(0.135)
(0.133)
(0.002)
(0.0008)
2.192
2.156
0.009
3
0.00
(0.1)
(0.101)
(0.004)
2.407
2.222
0.009
0.121
4
(0.124)
(0.112)
(0.005)
(0.052)
3.171
2.865
0.124
0.148
5
(0.097)
(0.082)
(0.024)
(0.034)
2.294
2.154
0.041
0.048
Total
(0.051)
(0.047)
(0.006)
(0.011)
Equal # Females Males WITHOUT children
1.71
1.589
0.009
1
0.00
(0.037)
(0.031)
(0.002)
1.939
1.761
0.031
0.003
2
(0.067)
(0.065)
(0.009)
(0.001)
2.099
1.955
0.056
0.073
3
(0.097)
(0.078)
(0.016)
(0.032)
2.789
2.574
0.096
0.0868
4
(0.104)
(0.093)
(0.026)
(0.029)
3.423
3.035
0.128
0.2393
5
(0.102)
(0.092)
(0.019)
(0.047)
2.282
2.083
0.054
0.068
Total
(0.04)
(0.036)
(0.006)
(0.012)
13
# of HHs
292
149
161
212
277
1091
214
71
68
77
130
560
280
137
112
137
186
852
Table 7- Tax incidence for each consumption category by sex composition and quintile
(Standard Errors in parentheses)
Category
Food subtotal
*Basic
*Other
*Sugar/confectionary and others
Meals out
Non-alcoholic beverages
Beer
Spirits
Tobacco
Clothing and footwear subtotal
Housing, Water, Electricity, Gas
Subtotal
*Utilities
*Housing
Fuel for HH use
Furniture, HH Equipment and
Maintenance
Domestic and household services
Medical expenditure
Transportation Subtotal
*Collective forms of transport
*Private Transport including air
Fuel for transport
Communication
Recreation
Education
Miscellaneous
Personal care subtotal
Male Dominated
4
1
2
3
0.368
(0.009)
0.178
(0.005)
0.154
(0.007)
0.036
(0.006)
1.17
(0.112)
0.278
(0.016)
0.366
(0.005)
0.21
(0.004)
0.128
(0.004)
0.028
(0.001)
0.175
(0.04)
0.139
(0.007)
0.358
(0.004)
0.201
(0.003)
0.126
(0.003)
0.032
(0.001)
0.092
(0.02)
0.124
(0.005)
0.33
(0.004)
0.179
(0.003)
0.119
(0.003)
0.032
(0.009)
0.098
(0.016)
0.118
(0.005)
5
Total
0.055
(0.008)
0.044
(0.005)
0.228
(0.004)
0.105
(0.011)
0.103
(0.011)
0.0013
(0.0002)
0.092
(0.004)
0.013
(0.0007)
0.00
0.438
(0.026)
0.016
(0.002)
0.016
(0.002)
0.00
0.029
(0.009)
0.075
(0.008)
0.083
(0.005)
0.00
0.018
(0.004)
0.279
(0.004)
0.296
(0.004)
0.142
(0.002)
0.118
(0.003)
0.036
(0.001)
0.085
(0.011)
0.119
(0.004)
0.001
(0.0007)
0.027
(0.004)
0.121
(0.009)
0.24
(0.004)
0.272
(0.01)
0.268
(0.01)
0.0035
(0.0004)
0.045
(0.002)
0.016
(0.001)
0.00
0.517
(0.032)
0.024
(0.003)
0.024
(0.003)
0.00
0.268
(0.022)
0.289
(0.013)
0.169
(0.006)
0.00
0.013
(0.001)
0.276
(0.004)
0.342
(0.002)
0.182
(0.002)
0.128
(0.002)
0.033
(0.001)
0.295
(0.022)
0.151
(0.004)
0.0002
(0.0002)
0.081
(0.007)
0.054
(0.005)
0.231
(0.002)
0.091
(0.004)
0.089
(0.004)
0.0015
(0.0001)
0.093
(0.002)
0.013
(0.0004)
0.00
0.326
(0.011)
0.016
(0.001)
0.016
(0.001)
0.00
0.067
(0.006)
0.094
(0.004)
0.074
(0.002)
0.00
0.014
(0.001)
0.295
(0.002)
0.00
0.00
0.00
0.00
0.13
(0.032)
0.072
(0.024)
0.24
(0.006)
0.009
(0.004)
0.009
(0.004)
0.0005
(0.0001)
0.12
(0.006)
0.01
(0.001)
0.00
0.133
(0.014)
0.011
(0.002)
0.011
(0.002)
0.00
0.0008
(0.0005)
0.034
(0.005)
0.027
(0.003)
0.00
0.012
(0.003)
0.341
(0.008)
0.085
(0.013)
0.015
(0.003)
0.225
(0.004)
0.018
(0.006)
0.0172
(0.006)
0.0006
(0.0001)
0.118
(0.005)
0.011
(0.001)
0.00
0.199
(0.014)
0.016
(0.004)
0.016
(0.004)
0.00
0.007
(0.007)
0.032
(0.008)
0.038
(0.004)
0.00
0.012
(0.002)
0.299
(0.006)
0.117
(0.018)
0.017
(0.003)
0.222
(0.004)
0.031
(0.007)
0.029
(0.007)
0.0014
(0.0002)
0.094
(0.003)
0.013
(0.001)
0.00
0.298
(0.019)
0.013
(0.002)
0.013
(0.002)
0.00
0.019
(0.009)
0.025
(0.003)
0.043
(0.004)
0.00
0.014
(0.003)
0.289
(0.005)
2.956
(0.123)
514
1.755
(0.053)
538
1.768
(0.036)
645
2.019
(0.035)
737
2.777
(0.044)
848
2.237
(0.028)
3282
*Necessary Personal Care
*Other
TOTAL
Number of HHs in quintile
14
Table 7- Tax incidence for each consumption category by sex composition and quintile
1
Category
Food subtotal
*Basic
*Other
*Sugar/confectionary and others
Meals out
Non-alcoholic beverages
Beer
0.398
(0.006)
0.227
(0.005)
0.147
(0.004)
0.024
(0.001)
0.086
(0.028)
0.1
(0.008)
0.00
Spirits
Tobacco
Clothing and footwear subtotal
Housing, Water, Electricity, Gas
Subtotal
*Utilities
*Housing
Fuel for HH use
Furniture, HH Equipment and
Maintenance
Domestic and household services
Medical expenditure
Transportation Subtotal
*Collective forms of transport
*Private Transport including air
Fuel for transport
Communication
Recreation
Education
Miscellaneous
Personal care subtotal
0.052
(0.009)
0.017
(0.003)
0.244
(0.008)
0.02
(0.008)
0.019
(0.008)
0.0011
(0.0002)
0.119
(0.005)
0.006
(0.001)
0.00
0.211
(0.018)
0.001
(0.001)
0.00
(0.0001)
0.001
(0.0007)
0.0003
(0.0002)
0.015
(0.005)
0.028
(0.004)
0.00
0.008
(0.002)
0.367
(0.009)
(Standard Errors in parentheses)
Female dominated
2
3
4
0.361
(0.005)
0.218
(0.004)
0.115
(0.003)
0.028
(0.001)
0.067
(0.015)
0.115
(0.007)
0.002
(0.002)
0.085
(0.014)
0.008
(0.014)
0.231
(0.005)
0.042
(0.01)
0.04
(0.01)
0.0013
(0.0002)
0.102
(0.004)
0.01
(0.001)
0.00
0.284
(0.025)
0.008
(0.002)
5
Total
0.363
(0.005)
0.209
(0.003)
0.122
(0.004)
0.032
(0.001)
0.029
(0.007)
0.104
(0.005)
0.328
(0.004)
0.183
(0.003)
0.109
(0.003)
0.036
(0.001)
0.038
(0.008)
0.106
(0.005)
0.309
(0.004)
0.149
(0.002)
0.122
(0.003)
0.038
(0.001)
0.029
(0.011)
0.117
(0.005)
0.00
0.00
0.00
0.061
(0.011)
0.009
(0.002)
0.23
(0.005)
0.065
(0.012)
0.063
(0.012)
0.0013
(0.0002)
0.094
(0.004)
0.012
(0.001)
0.00
0.323
(0.023)
0.012
(0.002)
0.035
(0.008)
0.106
(0.009)
0.237
(0.004)
0.298
(0.012)
0.295
(0.012)
0.003
(0.0006)
0.054
(0.003)
0.014
(0.002)
0.00
0.516
(0.03)
0.018
(0.002)
0.352
(0.002)
0.197
(0.002)
0.123
(0.002)
0.032
(0.0006)
0.05
(0.007)
0.108
(0.003)
0.003
(0.004)
0.058
(0.005)
0.034
(0.002)
0.236
(0.002)
0.11
(0.005)
0.109
(0.005)
0.002
(0.0002)
0.09
(0.002)
0.011
(0.001)
0.00
0.346
(0.011)
0.011
(0.001)
0.00
0.00
0.018
(0.002)
0.161
(0.016)
0.327
(0.017)
0.177
(0.008)
0.00
0.014
(0.002)
0.28
(0.005)
0.011
(0.001)
0.045
(0.005)
0.099
(0.005)
0.074
(0.003)
0.00
0.011
(0.001)
0.311
(0.003)
2.692
(0.043)
660
1.945
(0.019)
2552
0.00
0.00
0.008
(0.002)
0.0005
(0.0006)
0.024
(0.006)
0.033
(0.005)
0.00
0.012
(0.004)
0.299
(0.006)
0.012
(0.002)
0.005
(0.003)
0.033
(0.005)
0.051
(0.005)
0.00
0.009
(0.001)
0.29
(0.007)
0.055
(0.011)
0.028
(0.005)
0.238
(0.004)
0.127
(0.013)
0.125
(0.013)
0.0014
(0.0002)
0.079
(0.003)
0.013
(0.001)
0.00
0.399
(0.025)
0.014
(0.002)
0.0001
(0.0001)
0.014
(0.002)
0.059
(0.013)
0.095
(0.012)
0.078
(0.006)
0.00
0.012
(0.002)
0.316
(0.006)
1.682
(0.035)
436
1.688
(0.03)
461
1.984
(0.039)
533
*Necessary Personal Care
*Other
TOTAL
Number of HHs in quintile
1.673
(0.041)
462
15
Table 7- Tax incidence for each consumption category by sex composition and quintile: Equal #
Females Males Households (Standard Errors in parentheses)
Category
Food subtotal
*Basic
*Other
*Sugar/confectionary and others
Meals out
Non-alcoholic beverages
Beer
2
0.396
(0,116)
0.235
(0.004)
0.138
(0.004)
0.024
(0.001)
0.015
(0.13)
0.123
(0.176)
0.129
(0.52)
0.011
(0.042)
0.206
(0.116)
0.026
(0.178)
0.025
(0.009)
0.0011
(0.0001)
0.105
(0.063)
0.01
(0.029)
0.00
0.213
(0.305)
0.007
(0.049)
0.007
(0.002)
0.368
(0.101)
0.217
(0.004)
0.123
(0.003)
0.028
(0.001)
0.031
(0.213)
0.111
(0.129)
0.001
(0.027)
0.084
(0.288)
0.015
(0.063)
0.222
(0.101)
0.038
(0.184)
0.037
(0.01)
0.0013
(0.0002)
0.108
(0.096)
0.011
(0.018)
0.00
0.291
(0.494)
0.006
(0.029)
0.006
(0.002)
Tobacco
Clothing and footwear subtotal
Housing, Water, Electricity, Gas
Subtotal
*Utilities
*Housing
Fuel for HH use
Furniture, HH Equipment and
Maintenance
Domestic and household services
Medical expenditure
Transportation Subtotal
*Collective forms of transport
*Private Transport including air
0.00
Fuel for transport
Communication
Recreation
Education
Miscellaneous
Personal care subtotal
5
Total
0.043
(0.237)
0.136
(0.293)
0.127
(0.187)
0.00
0.021
(0.073)
0.299
(0.124)
0.305
(0.115)
0.14
(0.003)
0.126
(0.004)
0.039
(0.002)
0.063
(0.301)
0.109
(0.118)
0.001
(0.028)
0.017
(0.129)
0.101
(0.225)
0.228
(0.108)
0.319
(0.292)
0.316
(0.014)
0.0029
(0.0007)
0.043
(0.066)
0.016
(0.032)
0.00
0.659
(1.071)
0.022
(0.048)
0.022
(0.002)
0.0005
(0.0006)
0.218
(0.569)
0.391
(0.439)
0.173
(0.169)
0.00
0.011
(0.017)
0.269
(0.118)
0.355
(0.113)
0.199
(0.002)
0.125
(0.002)
0.031
(0.001)
0.051
(0.0274)
0.109
(0.134)
0.0005
(0.017)
0.07
(0.318)
0.037
(0.141)
0.223
(0.107)
0.119
(0.276)
0.118
(0.006)
0.0016
(0.0002)
0.086
(0.084)
0.013
(0.027)
0.00
0.371
(0.664)
0.012
(0.049)
0.012
(0.001)
0.0001
(0.0001)
0.052
(0.287)
0.113
(0.279)
0.079
(0.149)
0.00
0.014
(0.045)
0.306
(0.134)
2.184
(0.051)
411
2.944
(0.063)
455
2.011
(0.023)
2043
0.365
(0.105)
0.214
(0.004)
0.121
(0.004)
0.03
(0.001)
0.097
(0.404)
0.095
(0.105)
0.326
(0.104)
0.178
(0.003)
0.113
(0.004)
0.035
(0.001)
0.059
(0.266)
0.106
(0.115)
0.00
0.00
0.066
(0.256)
0.022
(0.087)
0.225
(0.099)
0.072
(0.264)
0.072
(0.014)
0.0008
(0.0001)
0.093
(0.087)
0.011
(0.024)
0.00
0.294
(0.434)
0.011
(0.043)
0.011
(0.002)
0.036
(0.137)
0.048
(0.194)
0.239
(0.103)
0.184
(0.342)
0.182
(0.017)
0.0021
(0.0004)
0.075
(0.085)
0.017
(0.029)
0.00
0.454
(0.725)
0.017
(0.067)
0.017
(0.003)
0.00
0.00
0.00
0.0004
(0.007)
0.015
(0.064)
0.014
(0.06)
0.00
0.013
(0.045)
0.349
(0.156)
0.003
(0.044)
0.023
(0.104)
0.043
(0.116)
0.00
0.013
(0.031)
0.295
(0.123)
0.018
(0.165)
0.039
(0.146)
0.064
(0.142)
0.00
0.011
(0.043)
0.309
(0.129)
1.634
(0.032)
418
1.662
(0.035)
378
1.79
(0.04)
381
0.00
Spirits
Equal # Females Males
3
4
1
*Necessary Personal Care
*Other
TOTAL
Number of HHs in quintile
16
The graphs revealed that the overall tax incidence is highest for the lowest tail (q1) in the male
dominated households without children when compared to all other categories of households (Figure 1).
The trend remained the same even after disaggregating the tax incidence to VAT incidence and excise
incidence (Figure 2 and 3). Leaving the q1 aberration of male dominated households without children
households apart, the highest tax incidence is noted among the higher quintiles of Equal # Females Males
households without children; at aggregate and disaggregate levels of incidence analysis. It is further
revealed that VAT incidence is relatively higher for female dominated without children households than
female dominated households with children. The tax incidence is found relatively lower in households with
children than in households without children in male dominated category also .
However, the food tax incidence plot reveals an entirely contradicting picture. The lowest quintile of
female dominated households bear higher tax incidence than male dominated households, though the
incidence of lowest tail of female dominated households are found comparable to Equal # Females Males
households. It is also revealed that across all categories, the lowest quintiles bear higher food tax incidence
than the higher quintiles, which has serious policy implications related to taxing the essential commodities.
17
% of Total Post Tax
Expenditure
Total Tax Incidence: Family Types
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1
2
3
4
5
Quintile
Male dominated WITH children
Female dominated WITH children
Equal # Females Males WITH children
Male dominated WITHOUT children
Female dominated WITHOUT children
Equal # Females Males WITHOUT children
Total VAT Incidence: Family Types
4.5
4
% of Total Post Tax Expenditure
3.5
3
2.5
2
1.5
1
0.5
0
1
2
3
4
5
Quint ile
Male dominated WITH children
Female dominated WITH children
Equal # Females Males WITH children
Male dominated WITHOUT children
Female dominated WITHOUT children
Equal # Females Males WITHOUT children
18
Total Excise Tax Incidence: Family Types
0.18
0.16
0.12
0.1
0.08
0.06
0.04
0.02
0
1
2
3
4
5
Quint ile
Male dominated WITH children
Female dominated WITH children
Equal # Females Males WITH children
Male dominated WITHOUT children
Female dominated WITHOUT children
Equal # Females Males WITHOUT children
Food Tax Incidence: Family Type across Quintiles
0.45
% of Post Tax Expenditure
% of Total Post Tax Expenditure
0.14
0.4
0.35
0.3
0.25
1
2
3
4
5
Quintiles
Male Dominated
Female dominated
19
Equal # Females Males
Policy Simulations
Given the fact that tax on items of basic necessities is one of the main reasons for the
regressive tax incidence, one needs to see how the alteration of the rate structure of taxes affect
the incidence of taxes across various groups for alternative policy options.
We do two
alternative simulations: Firstly, we find out the incidence outcome by zero rating of all food
items in the consumption basket. Secondly, we also see when the items of non-necessity like
tobacco is taxed at higher rates how the incidence varies across households.
Zero rating of food does reduce the overall tax burden in all the category of households,
but it does not change the pattern of tax incidence. For example, even when the food is zero
rated, the female headed households still bears the highest incidence vis-à-vis male headed
households (Table 8). However, when the rates on tobacco is increased, which is primarily
consumed by men, we see that aggregate tax incidence in male headed households become
higher than the female headed households. According to the category of household sex
composition, the tax incidence falls most on the male dominated category followed by equal
female and male category and female dominated category respectively (Table 9). These policy
simulations brings us back to what was mentioned earlier about the gender relation within the
households and the decision making process. Higher tax on non-necessity like alcohol and
tobacco if reduces the real consumption, taxing them at a higher rate may alter the tax incidence
but if it reduces consumption of necessities then we may get a situation of lower tax incidence of
necessities due to lower consumption of those goods. We need to look at these issues more
closely especially household decision making process and intra-household allocation of
resources and consumptions.
20
Table 8: Policy Simulation 1: Tax on All Food == 0
Total
Tax
VAT
Excise
Tax
Fuel
Tax
Number of
Households
1.5051
(0.0119)
1.3283
(0.0097)
0.0444
(0.0025)
0.0595
(0.0037)
7066
Female headed
1.6345
(0.0339)
1.5355
(0.032)
0.0272
(0.0037)
0.0239
(0.0059)
821
Total
1.518
(0.0113)
1.3489
(0.0093)
0.0427
(0.0023)
0.0559
(0.0034)
7877
1.5158
(0.0181)
1.3151
(0.0139)
0.0533
(0.0047)
0.0668
(0.0061)
3282
Female-dominated
1.4922
(0.0181)
1.356
(0.0159)
0.0335
(0.0024)
0.0451
(0.0047)
2552
Equal # females & males
1.5515
(0.0231)
1.3919
(0.0197)
0.0371
(0.0031)
0.0521
(0.0063)
2043
Total
1.518
(0.0113)
1.3489
(0.0093)
0.0427
(0.0023)
0.0559
(0.0034)
7877
Headship
Male headed
Household Sex Composition
Male-dominated
Table 9: Policy Simulation 2: Tax on Tobacco Doubled
VAT
Excise
Tax
2.1658
(0.0162)
1.9027
(0.014)
0.1298
(0.0046)
0.0598
(0.0037)
7066
Female headed
2.1595
(0.0379)
2.0219
(0.0356)
0.0654
(0.0067)
0.0241
(0.0059)
821
Total
2.1652
(0.0151)
1.9145
(0.0131)
0.1234
(0.0042)
0.0562
(0.0034)
7877
2.3295
(0.0293)
2.0364
(0.0257)
0.1447
(0.0088)
0.0671
(0.0061)
3282
Female-dominated
2.0146
(0.0192)
1.8094
(0.0168)
0.102
(0.0043)
0.0453
(0.0047)
2552
Equal # females & males
2.091
(0.0236)
1.852
(0.0197)
0.1159
(0.0055)
0.0524
(0.0064)
2043
Total
2.1652
(0.0151)
1.9145
(0.0131)
0.1234
(0.0042)
0.0562
(0.0034)
7877
Total Tax
Fuel Tax
Number of
Households
Headship
Male headed
Household Sex Composition
Male-dominated
21
5.
Conclusions and Policy Implications
Our objectives in this paper have been to examine the indirect tax incidence across
households in terms of expenditure quintile and based on household characteristics. In the case
of indirect taxes, we observed that the incidence of taxation vary more with household
characteristics7 although in aggregate we find that the tax system in the state of West Bengal is
regressive across expenditure quintiles.
We observed that higher tax incidence for the lowest expenditure quintile arises primarily
due to the high incidence of taxes on the items of basic necessities and on intoxicants, viz., food,
clothing and footwear, fuel, tobacco and alcoholic and non-alcoholic beverages, while the
highest expenditure quintile bears the highest incidence of tax when it comes to housing, water,
electricity and gas and also health care and medicine and fuel and transport.
Interpretation of these results in Indian context becomes difficult for many expenditure
groups like in health care and medicine. The reason for low incidence for poorer households
could just that poor do not have access to the formal modern health care system, especially in
rural areas and that exclusion cannot be construed as lower incidence. Similar is the case with
housing, electricity and Gas.
Thus to conclude, if the burden of indirect taxes is a concern, it requires much closer
investigation by looking into the tax components in the items of basic necessities, especially on
the inputs, even when the final commodity is exempted from taxes. We also need to look into the
issue of net fiscal benefit to the poor and across gender for the purpose of pro-poor and progender fiscal policy, to see the net effect of government expenditure programme at household
level and the incidence of tax simultaneously, a task that is not easy.
7
Bird & Miller (1989) also observed similar findings in the context of Jamaica.
22
References
1.
Ahmed, E. and Stern, N (1991), “The Theory and Practice of Tax Reform in Developing
Countries”, Cambridge University Press, U.K, Chapter -2.
2.
Newbery, David and Nicholas Stern (1987) eds. “The Theory of Taxation for Developing
Countries”, Oxford University Press, New York.
3.
H.H. Hinrichs (1966) “A General Theory of Tax Structure During Economic
Development”, Cambridge, Massachusettes: International Tax Program, The Harvard
Law School.
4.
Burgess, Robin and Stern, Nicholas (1994) “Tax Reform in India”, Indian Journal of
Applied Economics, Vol.3, pp. 1 -81.
5.
Richard M. Bird and Barbara D. Miller (1989), “The Incidence of Indirect taxes on LowIncome Households in Jamaica”, Economic Development and Cultural Change,
Vol.37 (January), pp. 393-409.
6.
Rajemison, H. and Stephen D. Younger, “Indirect Tax Incidence in Madagascar :
Updated Estimates using the Input – Output Table”, Cornell Food and Nutritional
Policy Program Working Paper No- 147, September 2003.
7.
Younger Stephen D, et.al. (1999) “Tax Incidence in Madagascar: An Analysis using
Household Data”, World Bank Economic Review, Oxford University Press, Vol.13
(2), pp. 303-31, May.
8.
Sahn David and S.D. Younger (1998), “Fiscal Incidence in Africa: Microeconomic
Evidence”, Collaborative Research Project- Poverty, Income Distribution and Labour
Market Issues in Sub- Saharan Africa, AERC Working Papers, CR- 2-5, Nairobi.
23