Social Equity, Rural Livelihoods, and the Goods and Services Tax (GST) in Rural India: Evidence and Reflections with Reference to Karnataka's Sericulture Economy

Abstract The implementation of the Goods and Services Tax (GST) in 2017 marked a fiscal watershed in India, aiming to unify the national market. However, its implications for social equity and rural livelihoods remain complex. This paper utilizes secondary data from national household consumption surveys, agricultural reports, and industry statistics to analyze GST's impact on tax incidence, input costs, and income stability in rural India, with a specific focus on Karnataka's sericulture economy. The analysis reveals a progressive consumption tax structure, where the indirect tax incidence for the top income quintile is 37% compared to 31% for the lowest 50%, driven by the zero- rating of essential commodities. In the agricultural sector, the removal of cascading taxes has reduced cultivation costs by approximately ₹1,000 per hectare, fostering mechanization and contributing to a 43% rebound in Karnataka's cocoon output (2023- 24). However, the study also identifies persistent structural inequalities. Compliance burdens (GSTR filing, e-invoicing) and the digital divide have adversely affected micro- entrepreneurs. The 5% GST on silk yarn has increased operational costs for small reelers, leading to a decline in reeling units in regions like Ramanagara. The paper concludes that while GST has formalized the economy and benefited primary producers, it imposes a disproportionate compliance burden on rural micro-enterprises. Policy recommendations include enhancing composition limits, vernacular enablement of tax portals, and zero-rating handloom inputs to bridge the gap between formalization and rural sustainability. Keywords:GST 2.0, social equity, rural livelihoods, sericulture Karnataka, tax progressivity, MSME compliance, input tax credits. Introduction The implementation of the Goods and Services Tax (GST) on July 1, 2017, was the biggest indirect tax reform since India's independence. GST is a comprehensive tax that unifies various central and state taxes. It has been designed to create a seamless market, remove cascading effects, and widen the tax base. It has been called 'GST 2.0' after its implementation and stabilization phase. It has had a significant impact on the Indian economy. However, the interrelation of this economic policy and its micro-level implications on rural India and social equity is a subject of intense analysis. Rural India accounts for 65% of India's population. It is a region of agricultural activities and micro-level informal economic activities. It is a sensitive economic environment, and any fluctuation in the cost of inputs and products affects the economy. Initially, the apprehensions of GST implementation were based on its possible impact on inflation and informal economic activities. However, the rationale of GST and the implementation of the Input Tax Credit System was to decrease the cost of inputs for farmers and modernize the agricultural sector. This paper is a modest endeavor to evaluate the micro-level implications of GST on rural India by using secondary data. It is based on the sericulture industry of Karnataka, which is a sector of both agricultural and industrial activities. Karnataka is a key sector of India's economy, contributing to the production of raw silk. Ramanagara is a key district of Karnataka, contributing to the production of raw silk. By evaluating the impact of GST on the sericulture industry of Karnataka, this paper attempts to reflect on the larger theme of social equity. Review of Literature 2.1 GST and Social Equity The relationship between indirect taxes and equity has been a prominent feature of the indirect tax policy literature. Rao and Rao (2017) argued that indirect taxes, which existed before the introduction of GST, are inherently regressive, i.e., they affect the poorer sections of society disproportionately. The GST, which has introduced a multi-tiered rate structure, aims to address this issue of inequity to a certain degree. The studies of the Reserve Bank of India (2018) pointed out that the exemption of essential food items from GST and the introduction of a lower rate of GST applicable to mass consumption items have resulted in a higher degree of progressiveness of the GST. The GST, therefore, aims to achieve vertical equity, where the "ability to pay" principle becomes relevant. 2.2 Agricultural Sector and Input Costs The GST's impact on the agricultural sector has been analyzed from the viewpoint of reduction in input costs. Gulati and Wardhan (2018) emphasized that the pre-GST environment was characterized by a substantial cascading effect, where taxes levied on inputs such as fertilizers, pesticides, and machinery items were embedded in the final price without any credit mechanism. The introduction of ITC under GST theoretically reduced the cost of inputs. Chand (2019) emphasized that though some of the agricultural inputs faced a nominal increase in rates, the availability of credit for services, including transport and warehousing, and capital goods reduced the overall cost of cultivation, thus encouraging farmers to adopt mechanization. 2.3 The Textile and Sericulture Value Chain The textile industry, which includes sericulture, has traditionally enjoyed a number of tax holidays to protect the handloom industry. The GST's impact on the textile industry has been mixed. The Confederation of Indian Textile Industry (2018) emphasized that though the GST exemption of raw silk benefited farmers, the 5% GST rate imposed on silk yarn and fabrics creates a tax burden for weavers and reelers. Vijayakumar and Nagaraj (2019) emphasized that small-scale reelers in Karnataka, with a very narrow margin, faced a liquidity crunch because of the working capital being blocked due to tax payments, thus causing exits from the market. 2.4 Compliance Burden and the Digital Divide A critical stream of literature focuses on the administrative costs of GST. Mukherjee (2020) emphasized that the "digital first" approach of GST-requiring e-invoicing and online filings-poses a significant barrier for rural enterprises lacking digital infrastructure. This "compliance burden" often acts as a regressive force, disproportionately affecting small and medium enterprises (SMEs) in rural areas, potentially forcing them out of the formal economy (Kumar, 2018). Methodology This study employs a secondary data analysis approach to evaluate the impact of GST on rural livelihoods and social equity. 3.1 Data Sources The study relies on three primary categories of secondary data: National Consumption Data: Data from the National Sample Survey Office (NSSO) regarding household consumption expenditure is utilized to estimate tax incidence across different income quintiles. Agricultural and Sectoral Data: Statistics regarding input costs, cultivation areas, and productivity are drawn from the Ministry of Agriculture and Farmers' Welfare and the Ministry of Textiles. Sericulture Specifics: Detailed data regarding Karnataka's sericulture industry, including mulberry area, cocoon production, and the number of functioning reeling units, is obtained from the Central Silk Board (CSB) annual reports and the Karnataka State Sericulture Department. 3.2 Analytical Framework The analysis is structured around three key indicators: Tax Incidence: Measured as the percentage of indirect tax paid relative to total consumption expenditure, comparing the lowest 50% of the population (rural poor) with the top quintile. Cost Dynamics: Analyzing trends in cultivation costs and the impact of ITC on farm mechanization. • Sectoral Growth vs. Distress: Correlating GST implementation timelines with production statistics (cocoon output) and structural changes in the processing sector (number of reeling units). Findings and Discussion 4.1 Tax Incidence: A Progressive Structure The analysis of national consumption data reveals a distinct progressive trend in the tax burden under GST. The tax incidence for the top quintile of households stands at 37%, whereas for the lowest 50% of the population, it is significantly lower at 31%. This disparity is a direct result of the differentiated rate structure. • Zero-rate essentials: Essential commodities such as cereals, fresh vegetables, and fresh milk-which constitute a large share of the consumption basket for the rural poor -are exempt from GST (0%). High-rate durables: Conversely, durable goods and services, which are primarily consumed by higher-income groups, attract rates of 18% and 28%. This structure suggests that GST has successfully achieved a degree of social equity in consumption taxation, shielding the rural poor from heavy indirect tax burdens. 4.2 Agricultural Inputs and Livelihoods The removal of the cascading effect of taxes has yielded tangible benefits for the agricultural sector. Secondary data indicates that the effective cost of cultivation has reduced by approximately 1,000 per hectare. This reduction is attributed to: Input Tax Credits: Farmers and agricultural enterprises can now claim credits on taxes paid for tractors, harvesting machines, and drip irrigation equipment. Mechanization: The lowering of effective machinery costs has encouraged the adoption of modern agricultural practices. This positive shift is reflected in the resilience of rural incomes, particularly in high-value horticulture and commercial crops. 4.3 Case Study: Karnataka's Sericulture Economy Karnataka, particularly the Ramanagara district, serves as a microcosm to observe the dual impact of GST. The Upside: Farmer Prosperity: The exemption of raw silk and cocoons from GST has insulated primary producers from tax shocks. This policy support, combined with lower input costs, has driven significant growth. Official statistics show a 43% rebound in cocoon output in Karnataka during 2023-24 compared to the pre-GST baseline. Mulberry cultivation has expanded to 1.18 lakh hectares (2024-25 projecti