Distributional Incidence of Indirect Taxation on Consumer Groups in Sri Lanka: A Descriptive Study

Abstract

This study investigates how the indirect tax burden was distributed among households under different aspects. Sri Lanka's tax structure represents more indirect tax and significantly less direct tax income. Direct taxes satisfy the equity principle of taxation, while indirect tax is violated. Direct taxes are imposed according to the ability to pay. Persons who have a higher income will pay a higher rate of income tax, and persons who have less income will pay a lower rate of income tax. Unlike direct taxes, indirect taxes are paid by both rich and poor persons irrespective of their income level. Thus, the burden of the indirect tax will be badly impacted on poor households because when they purchase goods and services from the market, they pay a significant portion of indirect taxes compared with the average income. A consumer survey was performed, and data were collected using a structured questionnaire under the light of the Stratified Convenient Sampling Method. One hundred fifteen commodity baskets were selected based on the Colombo Consumer Price Index under the broad categories of food and non-food and eleven subcategories of commodity groups. Colombo District was selected as the sample district. Four hundred eighty-two respondents were collected, representing low-income, middle-income, and high-income households. The descriptive and quantitative approach were used for the analysis. The findings of the study emphasized that the indirect tax burden rate of low-income households was significantly greater than the indirect tax burden rate of high-income households. The regressive effect was reflected in the findings, indicating that poor households are bearing a higher indirect tax burden rate in terms of average income and average expenditure. The derived Lorenz Curves and the calculated Gini Coefficients also emphasized the regressive effect of the indirect tax, presenting an upward-sloping Lorenz Curve and negative Gini Coefficient values.