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

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.