Dr. Sanjiv Agarwal, FCA, FCS
India witnessed its biggest ever tax reform in July, 2017, almost a year back when it migrated to Goods and Services Tax (GST) w.e.f. 1st July, 2017, subsuming therein over a dozen central and state indirect taxes. Given the nature of its federal structure, India followed a dual model of GST with simultaneous levy of Central and State GST. India is not the only country to have GST (or modified form of GST which is nothing but a value added tax).
This was done with multi-slab GST rates so as to take care of heterogeneous of socio-economic profile. So India adopted a four tier GST rates, viz, 5%, 12%, 18% and 28%, besides there being a zero rate, composition rates and compensation cess on specified goods. In certain cases, a fixed levy has been specified (e.g., restaurants, hotels, jewellery etc) and in some cases, payment of GST has been prescribed under reverse charge where recipient has to discharge tax liability. There are multiple return obligations, besides compliances touching upon matching, reconciliation, e-commerce, e-way bill etc.
The spread of Value Added Tax (VAT), also called Goods and Services Tax (GST) has been the most important development in taxation world over in the last half-century. Limited to less than ten countries in the late 1960s, it has now been implemented by over 160 countries worldwide, making it the world’s most commonly used tax. In these countries, it typically accounts for one-fifth of total tax revenue. The recognized capacity of VAT is to raise revenue in a neutral and transparent manner. At the same time as VAT was spreading across the world, international trade in goods and services was expanding rapidly as part of globalization developments and revolution.
Most countries have adopted similar principles for the operation of their value added tax system, but there remain many differences in the way it is implemented. These differences result not only from the existence of exemptions and special arrangements to meet specific policy objectives, but also from differences of approaches in the definition of the jurisdiction of consumption and therefore of taxation. In addition, there are a number of variations in the application of value added taxes, and other consumption taxes, including different interpretation of the same or similar concepts; different approaches to time of supply and its interaction.
Over 160 countries in the world are currently levying VAT or GST. After India, UAE and other gulf countries have introduced VAT w.e.f. 1st January, 2018. Other nations working towards VAT / GST system include Afghanistan, Bhutan, Micronesia, Palau, Syria etc. Globally, indirect tax rates vary from zero related to as high as thirty percent.
Recently, World Bank made a comment in India Development Report about Indian GST system which is yet to take off properly and is in a nascent stage. Accordingly, Indian Goods and Services Tax (GST) system is among the most complex in the world with not only one of the highest tax rates but also one of the largest number of tax slabs. India has the highest standard GST rate in Asia, and second highest in the world after Chile.
According to World Bank, the tax rates in the Indian GST system are among the highest in the world. The highest GST rate in India, while only applying to a subset of goods and services traded, is 28 per cent, which is the second highest among a sample of 115 countries which have a GST (VAT) system and for which data is available. What makes the Indian GST system even more complex is the number of different GST rates applicable on different categories of goods and services. India currently has four non-zero rates: 5, 12, 18 and 28 per cent. Apart from that, several items are taxed at zero per cent while gold is taxed at 3 per cent. To make things worse, petroleum products, power and real estate have been kept outside the GST ambit. Apart from India, the countries that use four or more GST rates are Italy, Luxembourg, Pakistan and Ghana. According to the World Bank’s biannual India Development Update report, most countries in the world have a single rate of GST on other hand, 49 countries use a single rate, 28 use two rates and only five countries including India use four rates.
Not only this, it is not just the tax rates that distinguish India’s GST system from the rest of the world. The fiscal threshold for businesses to fall under the full GST impact in India is also the highest among all comparable countries.
It is an admitted fact that there is increased administrative tax compliance burden on firms and a locking-up of working capital due to slow tax refund processing. High compliance costs are also arising because the prevalence of multiple tax rates implies a need to classify inputs and outputs based on the applicable tax rate. Along with the need to apply the correct rate, firms are required to match invoices between their outputs and inputs to be eligible for full input tax credit, which increases compliance costs further.
It should not be forgotten that India’s population, size and business proportions are much larger in scope as compared to other countries. The area and scale of operation is also unique and large, compared to other countries.
While it may claim so, we also need to factor the socio-economic pattern and federal structure of India. For example, we can’t have a single rate of GST. We ought to have exemptions and composition. Changes as envisaged by GST regime are huge with long term consequences and asking taxpayers to change their way of doing businesses overnight is just not possible. It may require some time to understand, adjust and change to implement. Further, through GST Council or Ministry of Finance is silent on implementation road map, we have another comment from PM’s Economic Advisory Council Chairperson that GST would take ten years to stabilize and settle down. This again needs to be discounted as theory is always far away from practice and economist’s perception may not always hold good. If what he says comes true, it is also a reflection on all implementation agencies including the Government itself.
GST in ultimate analysis is likely to have positive impact on India’s economic growth and businesses, adding to tax GDP ratio, revenue, cost effectiveness, business efficiency and quality of life. But not overnight, over a period. GST is only a beginning and not an end in itself. It is a continuous process and as such only in work- in-progress stage. However, drawing actively from user-feedback, the government has been very alert to implementation challenges and continues to take steps to make GST compliance more simple and efficient.
Despite the initial hiccups, the introduction of GST has a far-reaching impact on reducing tax-related barriers to trade barriers, which is one of the primary goals of the introduction of GST in India. The next few months are crucial to the future course of action and calling GST a successful attempt.