January 17, 2022

Summary on International Lessons in Goods & Service Tax

The most recent development in the field of taxation during 20th century is the introduction of income-tax in the first half and value-added tax (VAT) in the second half. Until the mid 1980s, the structure for VAT was not fixed but it was implemented in Europe. Thereafter was the introduction of GST in New Zealand in 1986 which turned out to be a benchmark for the VAT system which was in operation. It was used for evaluating the VAT system. The most distinctive feature of the new GST is the comprehensive base with a single rate. The important elements of GST which was supported by majority people were as follows:

1) Simplicity with a single rate of 10 per cent and no exemption.

2) Revenue neutrality (no additional revenue was budgeted in the year of its introduction).

3) Measures to reduce the income-tax by organizing reform programme.

4) Abolition of the wholesale sales tax and increase in welfare payments. This was done to offset the impact of GST on pensioners and low income groups.

5) Wide consultation of the public before making any changes in the GST law.

Among all these, the most inconvenient thing to implement was simplicity with one rate and no exemption. Persuading the people that exemptions on food would give higher profits to wealthy class rather than needy was problematic. This was resolved when they were explained how much more a rich taxpayer pays for food in dollar terms but still it may be relatively small as a percentage of his/her income as compared with that of one in the low income category. The exemptions were removed in GST because such conundrums were similar to Sales tax system in India where there were multiple exemptions and any number of tax-rates giving rise to questions like whether coconut is a fruit or a nut.

Presently, the State vats now in operation have achieved simplicity by bringing down the number of rates to three or four but the problems in differentiating between goods and services to decide in which rate category they belong still persist. Thus, to compensate or to benefit the lower class which was suffering from no exemption in GST, a new mechanism was introduced to enhance family welfare support. A new mechanism to increase the possible regressively of GST, a family support tax credit (fstc) was introduced replacing the tax rebate that prevailed earlier. Fstc did have a negative impact on the was required for full compensation to the poor but initiative measures like family support were better methods to compensate families with dependent children rather than selective omission of food or children’s clothing.

The key facets which imposed liability under GST are as:

(i) Where there is a “supply”

(ii) The supply takes place in the course of furtherance of a taxable activity by a registered person.

The financial services under GST were exempted from supply and no ITC could be claimed on associated inputs. This is an unacceptable practice but continues mainly because of the difficulty in identifying and measuring the value of the service that could be brought under GST. To remove this problem, the tax system has exempted financial services treating the financial service provider as the final consumer of its inputs.

The next problem which arose under GST was the land transactions. It sounds easy to include land transactions within GST but the administrative issues which arose were the potential for fraud and default problems. Generally, a landowner should be taxed on the services he consumes for using the land, such as supply of timber but to treat him as consumer in the case of the “raw land value” as the GST base is difficult to justify in logic. However, the GST enacted in New Zealand made all sales of land from a registered person to a private person subject to gst at the full rate on the sale price whereas the land sold by a private person to a registered person/dealer is treated as a “second hand good” with a deemed input credit available to the purchaser. This created a wide possibility for fraud and held out a bonanza for private land owners. They formed companies to purchase land who can claim input credit.

Roger Douglas, the finance minister of New Zealand adopted and pushed the idea of a comprehensive tax on goods and services in the country and piloted the legislation to implement it, attributes the success of GST in New Zealand. 1980s. the bold initiatives would probably not be possible without an effective consultative process. How the public was consulted in developing a GST and constituents such as information, education and coordination played a vital role. Therefore it is analyses by the author that the structure of GST on a destination- based vat in an economic union or federation should be fixed keeping in mind the economic costs entailed by such as system. The framework or the draft model of GST has been made with an initiative to resolve the current tax issues faced by various industries. It is an attempt to bring harmony in tax laws across states with the objective of contributing to the growth story of the Indian economy. GST law in India is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.

Author Details: Ruchi Singh (University of Petroleum and Energy Studies)

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