The goods and services tax (GST), rolled out on July 1, 2017, cut marginal tax rates--the real, effective tax a business pays, technically the difference between the pre-tax and post-tax rate of return on an investment--on businesses in India in all sectors, except electricity, which is exempt from the new tax regime, according to a new study.

The fall in marginal tax rates was in the range of 1-23 percentage points across sectors, according to estimates by Gaurav S. Ghosh, senior manager, EY, a global consultancy, and Jack Mintz, director of the school of public policy at the University of Calgary, Canada.

Marginal tax is the rate businesses end up paying on each new unit of investment after considering the effect of all statutory taxes levied. A higher marginal tax rate means businesses have lower incentives for increasing investment and vice versa, the authors explained.

At 23.2%, the transport sector saw the largest drop in marginal tax rate. At 0.9%, agriculture saw the lowest drop.

Overall, marginal tax rate fell by five percentage points to 22% from 27%.

Marginal tax rate increased by 11.6 percentage points after GST was implemented in the electricity sector. As the sector remains outside GST, businesses cannot claim credits for taxes paid on inputs, Navneeraj Sharma, consultant in the chief economic advisor’s office, and Arvind Subramanian, chief economic advisor, wrote in the Indian Express on December 7, 2017.

Source: Gaurav S. Ghosh and Jack Mintz

GST is paid on every transaction in the supply of goods and services, and the tax levied at one stage can be set off or deducted from the tax to be paid at the next stage.

India has dual GST--central GST (CGST) and state GST (SGST). There is also an integrated GST (IGST) on the inter-state supply of goods and services, which can be set off against CGST and SGST that is to be paid.

All goods and services are taxed under one of six slabs--0.25%, 3%, 5%, 12%, 18%, 28% (click here and here)--wherever they are purchased, according to the Central Board of Excise and Customs.

(Vivek is an analyst with IndiaSpend.)

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