Abstract

The tax structure impacts household economic behavior in several ways including customer consumption, savings and disposable income. This study will be looking into how dual taxes, such as income taxes and GST, affect the purchasing power and consumption behavior of consumers in developing countries, such as India. The background of the study arose from concerns over the tax burden placed on middle-income families due to simultaneous income and consumption tax systems.

The study employs a conceptual and analytical methodology based on an extensive review of past literature and comparison of consumption tax systems between OECD and Nordic countries to conduct the research. The analysis of the data focuses on the efficiency of each tax system, equity of each tax system, administrative procedure, and behavioral impact of each tax system on household consumption. In addition, subsets of household consumption data and India’s fiscal policies are integrated to conduct the analysis of taxation in India.

The analysis shows that the imposition of dual taxes results in a decreased effective purchasing power, an alteration of consumption priorities, and a diminished ability to save. On the other hand, expenditure-based tax systems are found to offer superior efficiency by eliminating disincentives on the generation of income and promoting savings and provide revenue stability through consumption-based taxes. The study therefore proposes a consumer-driven expenditure-based tax system for India that has progressive consumption thresholds, protection for essential goods, and specific redistributive measures.

In conclusion, the study found that moving from a primarily income-based tax system to a primarily expenditure-based tax system with very limited progressive income taxation would promote the economic welfare of consumers, increase economic efficiency and provide the design of sustainable fiscal policy in India.