4.1 Distribution of Statutory Tax Rates, July 2017 and July 2020

FIGURE 4.1 Distribution of Statutory Tax Rates, July 2017 and July 2020

Source: gST council and Central board of indirect Taxes and Customs. Note: The figure shows the distribution of tax rates for the 5,390 product subheadings of the hSN in July 2017 and July 2020. The tax rates span five major tax rate slabs: 0 percent, 5 percent, 12 percent, 18 percent, and 28 percent. gST = goods and services tax. hSN = harmonized System Nomenclature.

a monthly self-declared summary of GST liabilities that is filed by registered GST dealers, along with other tax return forms, and the GST-REG-01, a form that the typical firm must file to register for the GST.

To make the analysis possible, important sample restrictions were adopted. Only single-product firms that reported sales in all 21 months on which the data are available were included. This gives a sample of 45,000 firms. The focus was on single-product firms for two reasons. First, the opportunities for tax avoidance are more limited among such firms than among multiproduct firms, which can relabel or misclassify their various products to receive the lower tax rate. Second, the data do not reveal the share of reported sales by product but only by total firm sales. Accordingly, the precise sales of a given product cannot be assigned, which becomes an issue among firms selling two or more products. To abstract from the extensive margin of firm entry and exit, the analysis was also working with a balanced sample of firms that reported positive sales in all 21 months of the data.

Single-product firms represent 31 percent of all GST-registered firms and 20 percent of total sales in Karnataka.12 Table 4.2 presents summary statistics on the singleproduct firms in the sample for the January 2018 cross section. The outcomes of interest are the taxable value of supplies shipped by the firms (taxable sales) and the tax liability. The ratio of the tax liability over the taxable sales provides the ETR paid by each firm. The table shows that the mean (median) ETR of the GST in January 2018 was 13 percent (14 percent), with substantial variation across firms: the 25th percentile of the ETR was 5 percent, and the 75th percentile was 18 percent.