GST- FAREWELL TO MULTILEVEL TAXATION A REVIEW OF LITERATURE Abstract On 8 th September 2016, President Pranab Mukherjee approved the government’s flagship Goods and Services Tax (GST) Bill .After going through a long journey of more than 16 years which first started in year 2000 in a committee headed by Asim Dasgupta, GST will finally come into force from 1 st April, 2017. GST is a single ‘unified’ indirect tax levied on goods and services that subsumes multiple taxes levied at the Central and the State level. After the introduction of Value Added Tax (VAT), GST will be a further major breakthrough towards an effective indirect tax reform in the country. This paper draws attention to the implications of a ‘comprehensive’ GST for economic growth, efficient resource allocation, GDP growth, tax compliance and administration, imports and exports, manufacturing sector, tax revenue efficiency and State finances. The findings of various task forces/committees conclude that GST may turn out to be a positive-sum game by bringing in “collective gain” for agriculture, manufacturing and trading sectors along with the final consumers and the government. Irrespective of the wide array of opportunities opened up by GST, the government must be mindful of its accompanying challenges such as development of a sound IT infrastructure, tax administration and modern information systems and determination of GST rate, exemptions, etc. The success of the government in addressing these challenges will determine the sustainability of this major indirect tax reform in the long run.
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GST- FAREWELL TO MULTILEVEL TAXATION
A REVIEW OF LITERATURE
Abstract
On 8th September 2016, President Pranab Mukherjee approved the government’s flagship Goods
and Services Tax (GST) Bill .After going through a long journey of more than 16 years which
first started in year 2000 in a committee headed by Asim Dasgupta, GST will finally come into
force from 1st April, 2017. GST is a single ‘unified’ indirect tax levied on goods and services that
subsumes multiple taxes levied at the Central and the State level. After the introduction of Value
Added Tax (VAT), GST will be a further major breakthrough towards an effective indirect tax
reform in the country. This paper draws attention to the implications of a ‘comprehensive’ GST
for economic growth, efficient resource allocation, GDP growth, tax compliance and
administration, imports and exports, manufacturing sector, tax revenue efficiency and State
finances. The findings of various task forces/committees conclude that GST may turn out to be a
positive-sum game by bringing in “collective gain” for agriculture, manufacturing and trading
sectors along with the final consumers and the government. Irrespective of the wide array of
opportunities opened up by GST, the government must be mindful of its accompanying
challenges such as development of a sound IT infrastructure, tax administration and modern
information systems and determination of GST rate, exemptions, etc. The success of the
government in addressing these challenges will determine the sustainability of this major indirect
tax reform in the long run.
Key Words: Goods and Services Tax (GST), ‘cascading’ effect of taxes, tax administration,
revenue neutral rate (RNR).
I. Introduction-
On 8th September 2016, President Pranab Mukherjee approved the government’s flagship Goods
and Services Tax (GST) Bill which will subsume a plethora of Central and State taxes and bring
about a unified indirect tax structure in the country. After going through a long journey of more
than 16 years, it will come into force from 1st April 2017. The discussion on GST first started in
2000 by an empowered committee headed by Asim Dasgupta. In 2003, the Kelkar Task Force
proposed a comprehensive GST in a move to achieve fiscal consolidation which was the main
objective of the Fiscal Responsibility and Budget Management Act, 2003.
GST is a single ‘unified’ indirect tax levied on goods and services that subsumes multiple taxes
levied at the Central and the State level. After the introduction of Value Added Tax (VAT), GST
will be a further major breakthrough towards an effective indirect tax reform in the country. This
paper draws attention to the implications of a ‘comprehensive’ GST for economic growth,
efficient resource allocation, GDP growth, tax compliance and administration, imports and
exports, manufacturing sector, tax revenue efficiency and State finances.
II. Objectives-
The objective of this paper is to review the existing literature on GST, paying special attention to
reports of various task forces/committees constituted for this purpose and to utilise the existing
studies to throw light on the following issues:
What weaknesses in the existing tax system led to the need for a ‘unified’ GST?
What should be the guiding principles for a ‘flawless’ GST?
What will be the impact of GST on the different sectors of the Indian economy and on
public finances?
What challenges lie ahead of GST?
III. Shortcomings of the Existing Tax Structure-
The deficiencies in the prevalent tax regime, namely the ‘cascading’ effect of taxes, inadequate
taxation of services, taxation of goods at the manufacturing stage and complexity in the tax
structure ushered in the need to introduce tax reforms. The existing tax regime was a severe
impediment to tax compliance, equity, efficiency and neutrality.
a) Cascading Tax Structure:
The prevailing multi-level and cascading taxes are one of the major flaws in the Indian
taxation system. A cascade tax or a “tax on tax” is one which is levied at every stage of
production and distribution till the point of final sale to ultimate consumer. As goods pass
through the supply chain (consisting of supplier, manufacturer, wholesaler, retailer and
consumer), each successive transfer is taxed inclusive of all previous taxes levied. As a
result of this “tax on tax” regime, an extra tax burden is borne by the ultimate consumer.
This can be explained with the help of the following example:
Table 1(appendix) shows different stages in the supply chain of furniture. It is assumed
that the government levies a 5% tax on all goods produced and distributed.
As shown in the table, tax levied at each stage entails a cascading effect. In Stage II, tax
@5% of ₹1, 00,000 i.e. ₹5,000 also includes tax @5% on ₹60,000 i.e. ₹3,000. Similarly,
in Stage III, tax @5% of ₹1, 60,000 i.e. ₹8,000 also includes tax @5% on ₹1, 00,000 i.e.
₹5,000 and so on. As a result of this ‘tax on tax’, the government collects tax of ₹26,000,
which is actually a rate of 14.13% (₹26000/ ₹1, 84,000). This excessive tax burden is
ultimately borne by the final consumer.
b) Inadequate taxation of services:
A major drawback of the existing tax system is the non-inclusion of many services from
the tax net. The service sector in India is one of the fastest growing in the world. It has
witnessed a remarkable boom since independence with annual growth rate of more than
9% since 2001. According to Economic survey 2014-15, almost 72.4% of India’s GDP
growth in 2014-15 came from the service sector. Despite being the largest contributor to
GDP, the existing distortionary tax system fails to adequately tax services.
According to CRISIL estimates, service tax to GDP ratio was only 8.64% in 2007-08.
Many services still remain outside the ambit of service tax levy. This has adversely
impacted the tax base and hence, the revenue productivity of the tax system. As a result,
this led to higher tax rates on manufacturing sector to maintain the tax-GDP ratio. Higher
tax rates on manufacturing sector not only discourage tax compliance, but also lead to
inefficient resource allocation. Since the major burden of indirect taxes is borne by
consumers of goods and not services, it distorts consumer’s preferences in favour of
consumption of services.
A recent survey by National Sample Survey Organization (NSSO) showed that the rich
spend substantially more on services than the poor, i.e. services are income-elastic in
demand.
For e.g.: rich spend a large amount of their income on recreational services (e.g. dining in
hotels, restaurants, watching movies in cinema halls), communication services (e.g.
mobile bills), beauty parlour services, etc. Therefore, maximum cover of services in the
tax net is essential from the viewpoint of equity in taxation.
c) Taxation of goods at manufacturing stage:
While the Centre has the power to levy taxes on goods up to the production level (e.g.
CENVAT is levied on goods produced in India), the States are empowered to levy taxes
on the sale of goods. Restricting the tax incidence to the point of manufacture is a severe
deterrent to tax efficiency and neutrality.
d) Complexity:
Economic growth of a country depends upon the tax regime it adopts. Complexity of tax
structure not only adversely affects growth and development but also encourages tax
evasion. It is also hampers the ease of doing business in a country. India’s taxation
structure is characterized by excessive and complex tax rates (Ghuge & Katdare). As a
result, India’s Tax-GDP ratio is very low not only in comparison to other developing
nations but also in comparison to the global average.
The PWC Paying Taxes Report 2016, stated that India’s Tax-GDP ratio was 17.7%,
much lower than the global average of 21.82%. According to World Bank Data, India
ranks far behind i.e. 157 among 189 countries in overall ease of paying taxes.
IV. The GST Model-
A report by Dr. Amaresh Bagchi (Bagchi Report) stated that:
“If the ills of the present system are to be remedied, the problems have to be attacked at their
roots and not by symptoms. The guiding principles should be neutrality, simplicity and equity”
According to the Report of the Task Force on Implementation of FRBM Act 2003, the goal of
fiscal consolidation should be attained by increasing tax revenues rather than curtailing
government expenditure. Thus, fiscal consolidation calls for tax reforms. The Task Force
outlined the following guiding principles for tax reforms: