GST Concept: Features, Impact, and GST in other Countries

GST Concept 2024: The fiscal policy of India took a monumental turn on July 1, 2017 as the government implemented Goods and Service Tax (GST). Goods and Service Tax is a destination-based tax that subsumes indirect taxes at both Centre and State level into a single tax with 5 slabs with option of availing input tax credit at each stage.

GST Concept

The discussion on this reform started nearly two decades ago inspired by positive empirical evidence from nearly 160 countries around the world including some of the most advanced, emerging and developing economies. India adopted a dual GST structure based on a pragmatic federal relationship that requires both the Center and States to play a crucial role in determining GST rates.

What is GST ?

Goods and Services Tax is levied on the manufacturing and sales of goods and services across the country. The tax is charged at every stage of the manufacturing process. GST is applicable for both the customer and the manufacturer. It is a destination-based tax. This means that GST is to be collected at the point of consumption. So, if a product is manufactured in Bihar and is sold in Bhopal, the tax will be levied in Bhopal. Moreover, at every stage of the manufacturing process where value is added to the product, GST is collected.

The types of GST are as follows:

• CGST (Central Goods and Services Tax): The tax is collected by the central government on the intrastate sale of goods and services.
• SGST (State Goods and Services Tax): The state government collects this tax based on the intrastate supply of services and products.
• IGST (Integrated Goods and Services Tax): The tax is charged on the supply of products and services between two states. The taxes are shared between the central and state governments.

Features of GST in India

• India’s GST regime is a perfect example of cooperative federalism between Centre and states.
• The process of rationalization of GST rates can be continued except for luxury goods to prune the list of items further especially from the 28% tax bracket. Value based classification, specification-based classification, and status of buyers may be removed for simple tax structure.
• The government sincerely attempted to provide resolution for industry specific issues and achieved an equilibrium between the industry’s expectations and the interest of the Revenue Department.
• Extensive cooperation and support in facilitating GST compliances by easing timelines for various GST-related compliances such as filing of GSTR 1, Annual Returns and Audit reports.
• Allocation of GST revenue to states based on consumptionbased destination tax on goods & services which had led to equitable growth in Indian states.
• The GST system runs under a canopy of strong technological support and tax authorities are working in the direction of digitizing most GST services which has led to technologically driven compliance mechanisms thereby reducing personal interface.

Positive aspects of GST

Introduced as one of the biggest economic reforms by the BJP led Modi government, the GST kicked off with the promise to streamline taxation and compliance burden. Experts also claimed that in many ways, it has streamlined the process. “Based on the one nation one tax ideology, GST has helped in reducing the cascading effect of tax considerably. Also, multiplicity of compliances under various indirect taxes has been reduced.

Hence, the introduction of GST in India has brought inefficiencies in indirect tax compliance, incidence and reduced the number of indirect tax authorities that a taxpayer needed to interact with. Another positive is the concept of e-invoicing which seeks to ensure greater transparency in supplier receives transactions. The introduction of e-way bill coupled with the crackdown on fake invoicing has helped in bringing in a substantial portion of GST revenues, which were either being evaded or under-reported, in order.

Back in 2014, India was ranked 142nd among 190 nations on the Doing Business Index. Five years of radical economic reforms and the introduction of a new indirect tax system have witnessed India steadily climbing up this index ladder. From 142nd in 2014 to 77th position last year and now to 63rd position as of October 2019 (as per World Bank’s ‘Doing Business’ 2024 report), India has come a long way

How GST in India is different from other Countries?

France was the first country to introduce the GST to reduce tax evasion. GST is not a new term, more than 140 countries have already implemented GST models. Indian GST model is closely similar to the Canadian model of dual GST. The concept of GST is more or less same like in other countries. However rates and compliance procedures may differ from country to country looking to individual requirements of that country.

A major difference can be noted that India has multiple rates of GST while in many of the countries the rate is uniform irrespective of the product. However, in India it was obvious because agriculture is not recognized as an industry. Secondly, when some products are charged at 0% or 5% there are bound to be some products which will be taxed at higher rates like 28%

Goods and service tax: New Zealand

• New Zealand introduced the GST in 1986. Initially, the rate of GST was 10%, which later rose to 12.5% in 1989 and finally 15% in 2010.
• The threshold limit of GST registration in New Zealand is NZ$60,000. You become liable to register if the annual turnover of your business is more than NZ$60,000 in any 12-month period.
• A registered person can opt to file returns monthly, twomonthly or six-monthly, depending upon the turnover.
• Exempted from paying GST
  1. Supplies of residential accommodation and many financial services such as paying and collecting interest
  2. Goods and services received as a donation from nonprofit entities
  3. Financial services
  4. Renting a residential dwelling etc.

Goods and service tax : Canada

Canada has Federal Goods and Service Tax (GST) & Harmonized Sales Tax. The former has just one rate of 5% and the latter varies from 0% to 15%. Returns in the country are to be filed on monthly, quarterly, on annual basis depending on the turnover. The threshold exemption limit is 30,000 Canadian Dollars.

Goods and service tax: Australia

Australia implemented the GST concept in 2000 at a rate of 10%. Australia replaced the existing taxes such as wholesale sales tax, debit tax, financial institutions duty, stamp duty on shares, leases, mortgages, and cheques. But, in Australia, 10% GST rate led to the lower revenue productivity from a tax collection standpoint.

In Australia, the GST is collected by the federal government and redistributed to the six states and two territories according to the amount recommended by the Commonwealth Grants Commission (CGC) on the basis of the principle of horizontal fiscal equalization (HFE). “The aim is to achieve equality in the provision of services and infrastructure; however, it often causes friction between the states when the GST revenue is divided. The effective veto that Australian states and the commonwealth enjoys makes any GST reform difficult to achieve

Goods and service tax: Malaysia

In Malaysia, GST was introduced in the year 2015 at a rate of 6%. They have a lower GST rate of interest in comparison to other Asian Countries. It brought down the cost of doing business in Malaysia, as it shifted the tax burden from manufacturers to consumers.

Goods and service tax : Brazil, Argentina and Russia

These countries have independent VATs at the Centre and the states. About these three countries, the 2015 CEA report stated: “Differences in base and rates weaken administration and compliance, and inter-state transactions difficult to manage.

Observations of World Bank

The World Bank has pointed out that India’s GST system is globally speaking, the toughest with not just the highest tax slabs but also the country with most number of tax slabs. India is among the five countries (Italy, Luxembourg, Pakistan and Ghana) that have 4 tax slabs as against 49 countries that have just one and another 28 countries that have two slabs. The World Bank has also noted that administrative tax compliances may have gone up and the burden might fall on firms given that tax refund process is slow. Multiple taxes are also a cause of high compliance cost.

Agenda for GST Reforms

• Measures to strengthen cash flow management for taxpayers for allowing offset of CGST liability of one or more states with the CGST balance at a national level. This sort of mechanism will facilitate the taxpayers in making optimum utilization of their cash or credit balances.
• Incentivizing end consumers to create a more compliant eco-system to prevent retailers for avoiding reporting GST on their supplies. This may also open avenues for them to avoid paying Income Tax on their income.
• Facility on transfer of balances in Cash / Credit Ledgers across multiple GSTINs of a single legal entity.
• Simplified one form for annual return and reconciliation instead of two forms GSTR-9 and GSTR-9C.
• Strengthening of AAR mechanism for dispute resolution.
• Non denial of Input credit availed by the corporates because of suppliers’ default due to non-filing of returns.
• The government needs to establish GST Tribunals to reduce litigation timelines and the pressure on courts.
• The state authorities for Advance Ruling should ideally also have an independent jurist member, apart from a representative from the tax department.

Conclusion

It has been four years since India embarked upon the GST considered to be the most revolutionary and radical tax reform since independent India. Despite initial teething issues the move & overall progress during the last four years had generally been smooth and satisfying besides that India had witnessed a very progressive, & growth catalyst regime. It greatly helped India in achieving the ambitious government’s target of bringing in ease of doing business as one India market.

While the GST regime ushered in numerous benefits, particularly in terms of removing tax cascading impact, compliance simplification, smoothening supply chain, tax consolidation, it has also encountered some challenges for MSME sector, input tax reconciliation for corporates, increase of tax base and formalization of economy.