Service Tax Hike: Elasticity of Demand and Incidence of Tax
Synopsis
The base article, presents three tables which outline the impact of the recently increased service tax on various services – luxurious services, basic services and financial services – and points out that there is an increase in cost of these services. However, the change in tax structure would influence the demand and supply curves of the services listed in the three tables. This case flyer introduces the participants/students to the concepts of Price Elasticity of Demand, Income Elasticity of Demand and Cross Elasticity of Demand and the Incidence of the Imposed Service Tax.
Prerequisite Conceptual Understanding (PCU)/Before the Classroom Discussion
The participants should be asked to read the following chapter to help them connect the concepts discussed in the case flyer.
- • Paul A. Samuelson, et al., “Supply and Demand: Elasticity and Applications”, Economics, 19th Edition (Special Indian Edition), McGraw Hill Education (India) Private Limited, 2014 – To understand the various types of elasticity and the impact of imposed tax i.e., Incidence of Tax
Case Positioning and Setting
The case flyer can be used in MBA or Executive MBA or Executive Development Programs, for the following modules/topics:
- • Elasticity of Demand and Applications – To understand the various types of elasticity and the incidence of tax
Preamble to the Case flyer Analysis and Suggested Orchestration
This case flyer is meant to introduce the participants to the three types of elasticity – Price, Income and Cross – along with the sub-types thereof. While elasticity as a concept is helpful in several decisions, especially in pricing-related decisions, it is also helpful in gauging the possible response when a tax is levied. This case flyer, with the help of The Economic Times’ article that estimates on how three services get affected as a result of additional/revised service tax, was used to illustrate the operation of three types of elasticity. The classroom discussion was carried out as presented in Exhibit (TN)-I........
Case Analysis and Discussion
I. Luxury Goods and Elasticity
1. Give few examples of luxury goods and the factors influencing in buying them.
Sports cars/luxury car brands like Porsche, Audi, BMW, Lexus, etc., sports bikes, Rolex watches, jewellery with large, rare or high-quality gems and diamonds, clothing from designer brands like Prada, Louis Vuitton bags, rare artwork, yachts, large mansions and ornate silverware are all examples of luxury goods. They might be functional or ornamental but all of them indicate the owner’s wealth and status. However, what constitutes as luxury for several people might just be a necessity for others.
Luxury goods are not necessities but make life more exclusive for the consumer. They are expensive and are often bought by individuals who have a higher disposable income. In Economics, luxury goods are defined as a good that has Income Elasticity greater than one, i.e., the demand for luxury goods is highly dependent on income. Changes in income produce proportionately large changes in the demand for luxury goods. There might be other factors that influence the buying of luxury goods, like the brand, social status and lifestyle, price, etc. It should however, be noted that even antiques can be luxury goods at times, for instance, possession of a heritage building................
Exhibits
Exhibit (TN)-I: Suggested Classroom Orchestration
Exhibit (TN)-II: Price Elasticity of Demand of Luxury Services
Exhibit (TN)-III: Income Elasticity of Demand of Luxury Services
Exhibit (TN)-IV: Cross Elasticity of Demand of Luxury Services
Exhibit (TN)-V: Incidence of Tax on Producer and Consumer of Luxury Services
Exhibit (TN)-VI: Price Elasticity of Demand of Basic Services
Exhibit (TN)-VII: Income Elasticity of Demand of Basic Services
Exhibit (TN)-VIII: Cross Elasticity of Demand of Basic Services
Exhibit (TN)-IX: Movements and Shifts in Demand of Basic Services
Exhibit (TN)-X: Tax Incidence of Basic Services
Exhibit (TN)-XI: Impact of Service Tax on Demand and Supply of Services
Exhibit (TN)-XII: Price Elasticity of Demand of Financial Services
Exhibit (TN)-XIII: Income Elasticity of Demand of Financial Services
Exhibit (TN)-XIV: Cross Elasticity of Demand of Financial Services
