Question

General sales tax (GST) imposes the same tax rate on the purchase of all commodities. Some...

General sales tax (GST) imposes the same tax rate on the purchase of all commodities. Some people suggest certain goods (e.g. basic food) should be exempted from taxes such that a targeted group of people (e.g. the poor) will not be harmed.

In terms of equivalent taxes, describe a tax scheme (not a commodity tax scheme) that is equivalent to GST combined with such exemptions.
Briefly comments on which schemes will serve the policy purpose better.

Homework Answers

Answer #1

Any General Sales Tax scheme basically imposes the same tax rate on the purchase of all commodities. This makes sense in a way that it's simplistic and allows for better understanding of revenue. There could be slabs however, to make the process more realistic. I say realistic because, for instance, it is not fair to charge the same amount of tax for food, and say, luxury items like jewelry, or hazarduous goods like tobacco.

Thus the government can make the tax rates slab wise so as to distinguish between the relative importance in revenue structure. Food items and other basic necessities can be in the lowest tax slab, luxury and hazarduous material in the highest tax slab and so on.

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