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    How GST would change Taxation in India – Part 1

    By

    October 25, 2015

    India is going through a phase of cynicism. While the Government wants to showcase the latent force of India’s economic might, it has not been fully able to translate its intention into visible reality.

    A complete overhaul of the present indirect taxation structure would surely display this resolve.

    Let me present you how the Goods and Services Tax (GST) can change the face of Indian taxation.

    More than doing away with mind-numbing legislation, what will be prized more – is simplification of business.  

    1)     Indian Economy –

    Allow me to begin by saying a few words about the Indian economy. India is now the 7th largest economy in the world by nominal GDP at $ 2 Trillion equivalent to Rs 120 lac crores and the 3rd largest by purchasing power parity (PPP). It is a major part of G-20 and G-4 economies, with approximately 7% average growth rate in the last two decades.

    With each passing day India is inching towards success

    2)     Example of Truck Driver and Traders –

    Before moving on to discuss the theme, let me share with you 2 personal instances which helped me understand the hurdles presented by the incumbent indirect tax regime.

    Around a month back, I, along with a few friends, was travelling when our car broke down near Gurgaon Toll. There we struck a conversation with a group of truck drivers who displayed deep anguish on wasting time at tolls for getting administrative clearances.

    When I went a bit deeper, I found out an Indian driver brother clocks an average 280 kms per day, much below the world average of 400 kms per day. The underperformance of Indian truckers is less on account of bad roads and more about prevailing archaic laws. In fact there are 650-odd check posts in the country and 11 categories of taxes on the road transport sector alone. Even if the distance covered goes up by 20 per cent per day, Indian truck productivity would improve by 12 per cent. Higher productivity would cut the need for buffer stocks and cut down the need for many warehouses.

    They even had enough time to cook for themselves

     Another example is of my uncle, who’s a trader. Seeing him speak about the tax procedural requirements and compliances, I felt sad and the image below is somewhat similar to what I imagined of him.

    Now, think of yourself as the man in the middle of the image, and how do you feel ? Very inconvenient, right ?

    But there is a solution to both the problems of the truck driver and my dear uncle, and it is– the introduction of the Goods and Services Tax (Popularly known as VAT globally). But before coming to that, let to highlight the present indirect taxation structure and its limitations.

    3)     India’s Present Indirect Taxation Structure –

    As can be seen, presently there are majorly 5 types of indirect taxes levied by Centre (Excise, and Service Tax, Customs) and State (Sales, VAT, Entry Tax among others) combined. These are as per powers drawn from the Constitution.

    Due to presence of a federal structure and inelasticity between Centre and State Govt, credit for taxes paid to Union Govt. (CENVAT paid on Excise and Service Tax, Central Sales Tax on inter-state sale of Goods) and that to State Govt (VAT on intra state sale, octroi, others) are not allowed for set off from each other. This leads to double taxation, complexity and negates the basic concept of neutrality.

    Incumbent structure leads to double taxation, complexity and negates the basic concept of neutrality.

    4)     Its Limitations –

    Though after introduction of VAT in 2005 was a relief, the present structure still suffers from serious lapses

    • Different laws for taxing Goods and Services leads to extreme ambiguity and legislation
    • Origin based structure fails to take into account value added in chain of distribution e.g. Central Excise does not account for value added for dealers
    • Multiplicity of Central and State taxes leads to high compliance, maintenance of books and confusion
    • Tax on tax (Tax cascading) is widespread due to above reasons, which leads to rise in ultimate price offered to you and me for consumption.

     

    Coming back to GST–

    5) What is GST and how it will prove to be India’s silver bullet

    GST is a broad based and a single comprehensive tax levied on goods and services consumed in an economy. Its main objective is to consolidate all indirect tax levies into a single tax (except basic custom duty) under one umbrella.

    France was the first country to adopt GST and now more than 150 nations across the globe vouch it as a favourable tax structure. For example, GST’s introduction in New Zealand in 1987, yielded revenues 45% higher than anticipated. The GST in Canada resulted in an increase in GDP by 1.4%.

    Refer below for the GST rates in different countries with highest in Denmark and Sweden at 25% and lowest at 5% in Japan, Malaysia, and Taiwan.

    6)     Advantages –

    • Goods and Services in One Basket –

    By bringing both goods and services under one ambit, it does away with unnecessary legislations and wastage of efforts of judging “Sale Vs Service”

    • Destination based tax –

    Unlike excise, it is not an origin based tax but which takes into account activity at each stage of making goods available to the consumer.

    • Unified market eliminating multiplicity of taxes –

    The GST will cut down the large number of taxes imposed by the central government and states and would facilitate seamless movement of goods across states and reduce the transaction cost of businesses.

    • Elimination Tax on Tax –

    GST is a tax levied throughout the chain of production, and distribution with credit for the earlier stage available for set off on the next stage.

    • Neutrality –

    Facilitate investment decisions being made on purely economic concerns, independent of tax considerations.

    • Promotes exports –

    Foreign trade indicates that the rate of growth of exports will be significantly higher than that for imports.

    It a nutshell, the present vicious cycle of “narrow base – high rate – low compliance” would change to a virtuous cycle of “wider base-lower rate-better compliance”.

    Stay tuned for Part 2, where we will see the proposed GST Model in India along with an illustration, and judge how indirect taxation stands to change by the onset of the Goods and Services tax. 

    http://economydecoded.com/2015/10/how-gst-would-change-taxation-in-india-part-2.html (Part 2)

     

    Views presented in the article are those of the author and not of ED.

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