Tax-Pass-through, Pricing Strategy and Consumer Spending Dynamics: The Indian GST Experience

38 Pages Posted: 14 Jun 2019

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Debarati Basu

Indian Institute of Management (IIMB), Bangalore

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore

Bhuvanesh Pareek

Indian Institute of Management (IIM), Indore

Jian Zhang

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences

Date Written: May 31, 2019

Abstract

Measuring the consumption response to a tax regime has been a central issue in the optimal design of fiscal policy. This study leverages a large-scale natural experiment in India, the 2017 Goods-Service-Tax (GST) Reform, to quantify its impact on suppliers’ pricing strategy and consumer spending. Using scanner data on purchasing behavior of a panel of households and a triple difference design, we find a spending reduction in quantities of 0.23 percent, on average, following one percentage point increase in the GST tax. Tax elasticity is not uniform across product categories and is highest for goods in the fresh and fashion class (2.1 and 1.7, respectively). Consumers exhibit intertemporal substitution by preponing spending during the announcement period and substitute consumption across products. We also find evidence of asymmetry for tax pass-through to consumers. The tax is shifted at a lower rate in the case of tax rise, but when the tax is reduced, the elasticity of the tax exclusive price is significantly smaller than -1, resulting in a higher final price and a lower level of spending.

Keywords: Tax Pass-through, Consumption, Big Data, Household Finance

JEL Classification: D12, D14, E52

Suggested Citation

Agarwal, Sumit and Basu, Debarati and Ghosh, Pulak and Pareek, Bhuvanesh and Zhang, Jian, Tax-Pass-through, Pricing Strategy and Consumer Spending Dynamics: The Indian GST Experience (May 31, 2019). Available at SSRN: https://ssrn.com/abstract=3396907 or http://dx.doi.org/10.2139/ssrn.3396907

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Debarati Basu

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Bhuvanesh Pareek

Indian Institute of Management (IIM), Indore ( email )

Prabandh Sikhar
Rau-Pithampur Road
Indore, Madhya Pradesh 453331
India

Jian Zhang (Contact Author)

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences ( email )

Hong Kong

Register to save articles to
your library

Register

Paper statistics

Downloads
29
Abstract Views
190
PlumX Metrics