1.Evaluate how changes in GST rates, such as reducing tax on essential goods and increasing tax on luxury items, align with the principles of a progressive tax system.
| SYLLABUS: General Studies III: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment. |
IN NEWS: Two-rate GST to kick in on September 22
A progressive tax system ensures that those with a higher ability to pay contribute more in taxes, while the burden on the economically weaker sections is minimized. While direct taxes like income tax are naturally progressive, indirect taxes like GST are typically regressive in nature. However, differentiated GST rates — with lower rates on essentials and higher on luxury or sin goods — aim to simulate a progressive structure within a consumption-based tax system.
How it aligns with progressive taxation:
1. Burden Shifts Towards the Affluent
Higher GST on luxury items (e.g., 40% on tobacco, high-end vehicles) ensures the wealthy contribute more.
Example: Taxing luxury watches at 40% targets high-income groups.
2. Essential Goods Become More Affordable
Reducing GST on daily-use goods, food items, and life-saving medicines eases financial pressure on the poor.
Example: Cement and essential medicines moved to lower slabs make housing and healthcare more accessible.
3. Supports Welfare State Objectives
Revenue from luxury/sin goods can fund subsidies and welfare programs.
Example: Tax revenue from cigarettes can support public health schemes.
4. Encourages Responsible Consumption
Higher GST on tobacco, alcohol, and luxury goods deters overconsumption and promotes public welfare.
Example: Sin taxes are globally used to curb harmful habits.
5. Insurance & Health Made More Inclusive
Placing individual life and health insurance under the 0% slab promotes financial inclusion.
Example: Cheaper insurance increases coverage among lower-middle-income families.
6. Reduces Regressivity of GST
Differentiated tax rates soften the inherently regressive nature of GST.
Example: Poor and rich no longer pay the same effective rate on all goods.
7. Enhances Social Equity
The tax system moves towards being a tool of social justice, reducing inequality.
Example: The rich contribute more without affecting the poor’s access to essentials.
Where it falls short of being truly progressive:
1. GST Remains a Consumption Tax
Even with differentiated rates, GST is inherently regressive, as the poor spend a larger share of income on consumption.
Example: 5% of food is still burdensome for the poorest, while the rich are less affected proportionally.
2. Classification Challenges
Defining what qualifies as “essential” or “luxury” can be arbitrary or politically influenced.
Example: Branded food items may be taxed higher despite being staples for many.
3. Compliance Complexity Increases
Multiple GST slabs create confusion, raise compliance costs, and burden small businesses.
Example: Businesses must manage invoicing, returns, and input credits across slabs.
4. Potential for Tax Avoidance
High taxes on luxury goods may lead to undervaluation, smuggling, or black-market activity.
Example: Under-invoicing of luxury items to avoid 40% GST.
5. Reduced Revenue from Essentials
Lower tax rates on essential items may strain government finances if not offset by compliance improvements. Example: Food and medicine tax cuts reduce revenue collection.
6. Disincentivizes Formalization in Some Sectors
High tax on insurance or formal housing (if not adequately addressed) can push people to informal/unregulated options.
Example: If insurance was taxed, people may avoid formal coverage.
7. Uniform Impact Across States
GST, being centrally managed, ignores regional disparities in consumption patterns and income levels. Example: What is “luxury” in rural Bihar may be “normal” in urban Mumbai.
While the recent changes in GST rates showcase a welcome tilt towards progressivity, they cannot fully transform GST into a progressive tax. A multi-rate structure helps reduce regressivity, but it adds administrative and economic complexity. For a truly equitable system, GST reforms must be coupled with strong direct taxation, targeted subsidies, and improved compliance. Progressive intent must be matched with transparent execution and continuous rationalization of slabs.
| PYQ REFERENCE :2020 Q: Enumerate the indirect taxes which have been subsumed in the Goods and Services Tax (GST) in India. Also, comment on the revenue implications of the GST introduced in India since July 2017. |
2.India and the European Union are natural partners in a multipolar world. In light of recent diplomatic efforts, evaluate the prospects and challenges of finalizing an India-EU Free Trade Agreement (FTA).
| SYLLABUS: General Studies II: Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests |
IN NEWS: Jaishankar meets German Foreign Minister, pushes for EU-India FTA
India and the European Union (EU) represent two of the largest democracies and economic powers with shared values such as democracy, multilateralism, sustainable development, and rules-based global order. The India-EU Free Trade Agreement (FTA) negotiations, stalled since 2013, have been revived amid shifting global geopolitics, supply chain re-alignments, and a growing desire for strategic autonomy in a multipolar world. Recent diplomatic efforts signal renewed commitment on both sides.
Prospects for Finalizing the India-EU FTA:
1. Strategic Realignment in a Multipolar World
Both India and the EU seek to counterbalance rising unilateralism and authoritarianism.
Example: EU’s Indo-Pacific strategy aligns with India’s Act East and Indo-Pacific outreach.
2. Complementary Economies
India offers a large, young market; EU offers capital and technology. Their trade interests are largely non-competing.
Example: EU needs IT services, India needs green tech and high-end manufacturing.
3. Supply Chain Diversification Post-COVID & Ukraine War
The EU wants to reduce dependence on China; India is a viable alternative.
Example: “China+1” strategy makes India a preferred partner for diversification.
4. Growing Political Will
High-level engagements show serious intent to push the deal forward.
Example: The 2023 launch of the India-EU Trade and Technology Council (TTC).
5. Shared Climate and Sustainability Goals
Common commitment to green energy, sustainable growth, and SDGs strengthens cooperation.
Example: Collaboration under the India-EU Clean Energy and Climate Partnership.
6. Investment and Innovation Opportunities
The EU is India’s largest investor; stronger trade ties could boost innovation, startups, and FDI.
Example: Several European companies are investing in India’s clean energy and digital sectors.
7. Alignment on Multilateral Platforms
India and the EU often collaborate in the WTO, G20, and UN forums, which can ease trade negotiations. Example:Both advocate for WTO reforms and rules-based trade.
Challenges to Finalizing the India-EU FTA:
1. Tariff Reduction Disagreements
India has high tariffs on EU exports like automobiles, wines, and dairy; EU wants significant cuts.
Example: Import duties on luxury cars exceed 100% in India.
2. Services Trade Barriers
India wants liberalization of services (IT, movement of professionals), which faces resistance in the EU. Example: Visa and work permit issues for Indian IT professionals.
3. Stringent EU Standards and Regulations
EU’s high standards on environment, labor, and data privacy may conflict with India’s developmental needs. Example: The proposed EU CBAM could affect Indian steel and aluminum exports.
4. Intellectual Property Rights (IPR) Disputes
The EU wants strong IPR enforcement; India resists over fears of higher drug prices and loss of flexibility. Example: India’s concern over TRIPS-plus provisions harming access to generic medicines.
5. Investment Protection Concerns
India’s withdrawal from BITs and skepticism towards investor-state dispute mechanisms pose roadblocks. Example: Vodafone and Cairn arbitration cases influenced India’s cautious approach.
6. Agricultural Market Sensitivities
EU’s subsidized agriculture and stringent sanitary measures could hurt Indian farmers and exporters. Example: EU’s SPS (Sanitary and Phytosanitary) measures restrict Indian agri-exports.
7. Complex EU Decision-Making Structure
Any FTA must be ratified by all 27 EU member states, making the process politically and procedurally complex. Example: The Canada-EU FTA (CETA) faced delays due to objections from regional parliaments like Wallonia in Belgium.
The India-EU FTA represents a significant opportunity to strengthen strategic, economic, and technological ties between two natural partners in a multipolar world. While genuine challenges exist—ranging from trade asymmetries to regulatory differences—recent political will, geopolitical shifts, and shared values provide a strong foundation. A balanced, phased, and mutually respectful approach is essential for converting this strategic ambition into a landmark agreement that supports inclusive growth, sustainability, and global rule-based trade.
| PYQ REFERENCE 2022: Q: India’s Free Trade Agreements (FTAs) with ASEAN, Japan and South Korea have not yielded the desired outcomes. Critically examine. |