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As India gears up for GST, many question high rate for a “necessity” (telecom services)

The introduction of GST to replace the patchwork of state taxes is perhaps the Modi government’s greatest economic achievement. The new regime is expected to come into effect on July 1, 2017. Like everything in India, it’s complicated, with multiple bands and exceptions.

It’s interesting that the 18 percent GST rate for telecom services is being challenged on the basis that it is a necessity.

Imposing 18 percent tax on telecom is likely to increase the overall tax burden and therefore may have a negative impact on the consumers’ expenses. It needs to be appreciated that telecom is a necessity and an extremely important infrastructure service & resource and thus deserves more sensitive treatment.

For those who want to examine the evidence on this question, academic research using Indian data exists:

This article analyzes patterns of expenditure on mobile phone services at the bottom of the pyramid (BoP), following users in six Asian countries: Bangladesh, Pakistan, India, Sri Lanka, the Philippines, and Thailand. We examine whether mobile phone services in the selected countries display characteristics of a luxury good or those of a necessity. We first evaluate the expenditure patterns of mobile phone services among five income groups within the BoP. Then, we estimate the income elasticity of mobile phone services using Engel curves. Based on these analyses, we conclude that mobile phone services are necessities at the BoP. We also find that any increase in price or tax adds the greatest burden on the poorest of the poor. We argue that the current high tax on mobile phone services in developing countries in Asia has an adverse effect on the poor.

The journal is open and the second author is Sri Lanka’s current Deputy Minister of Policy Planning and Economic Development.

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