GST is an indirect tax on the supply of goods and services. While calculating national income (NNP at factor cost) from NNP at market prices, how is GST treated?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → It is deducted, together with other indirect taxes, after adding subsidies
GST is an indirect tax, so it is part of the market price of goods. To reach national income, net indirect taxes (indirect taxes minus subsidies) are deducted from NNP at market prices.
NNP at FC = NNP at MP − (Indirect taxes − Subsidies)
GST is not added, since it does not go to the factors of production. It is a tax paid to the government, so it is not a transfer payment either.
This question uses Government Budget and the Economy and National Income Accounting together.
NCERT (2026-27): “Box 5.3: GST: One Nation, One Tax, One Market Goods and Service Tax (GST) is the single comprehensive indirect tax, operational from 1 July 2017, on supply of goods and services, right from the manufacturer/ service provider to the consumer. …” National Income Accounting: “2.3 Some Macroeconomic Identities … But market price includes indirect taxes. When indirect taxes are imposed on goods and services, their prices go up. Indirect taxes accrue to the government. We have to deduct them from NNP evaluated at market prices in order to calculate that part of NNP which actually accrues to the factors of production. Similarly, there may be subsidies granted by the government on the prices of some commodities (in India petrol is heavily taxed by the government, whereas cooking gas is subsidised). So we need to add subsidies to the NNP evaluated at market prices. The measure that we obtain by doing so is called Net National Product at factor cost or National Income. …” |