Realising GST's potential

Q. Will GST reduce the tax burden on individual producers and consumers?
The overall impact of the GST on individual producers and consumers would depend on the rate of GST. Assuming that the GST rate is revenue-neutral, the overall tax burden would remain unchanged. However, there would be a significant shift in the distribution of tax burden across different goods and services and sectors of the economy. In general, all producers would benefit from:

• Elimination of hidden and cascading taxes such as octroi, electricity cess, purchase tax, and Central Sales Tax; and
• Elimination of competitive distortions caused by exemptions and different tax rates.

Consumers would also benefit from a more transparent tax system. In all cases, the tax will be a given percentage of the price they pay for goods and services. Currently, consumers have no idea how much tax is included in the price. Improved compliance under the GST would permit a reduction in the tax rates, benefitting all consumers.

Q.Will GST make tax compliance easier and less costly?
If GST is applied at a uniform rate and to all goods and services, the compliance costs would decline significantly. There would be fewer disputes about classification of goods and the amount of tax to pay. GST would facilitate automation of compliance procedures and thus bring in greater efficiency. It would reduce interaction with the tax department. Many tax forms would be eliminated and others would be streamlined and simplified.

The check posts would become redundant. The current plethora of taxes would be replaced by a single tax that is harmonised between the Centre and the states and across the states.

Q.Like VAT, what loopholes can trip GST? For example, often we come across shopkeepers who avoid tax by not giving a cash memo.
GST is a multi-point tax collected at each point of the supply chain (manufacturer, distributor and retailer). It would therefore be difficult to avoid or evade tax by any single distributor. A shopkeeper, by not reporting a sale, can only avoid additional tax payable on his value added. The tax he would have paid to the suppliers on the purchase of goods would then be not recoverable.

In any case, if the tax rate is low and covers a comprehensive base, it would reduce the incentive to evade tax.

Q.In the Indian context, what in theory and practice must be noted for realising full benefits of GST?
Three aspects would be most important for realising the full potential of GST in the Indian context. The first is the uniformity in application of tax on all goods and services. This would help eliminate the classification disputes and reduce uncertainty in application of tax. Also, the tax would apply to the competing producers and distributors in a fair and equitable manner, which is necessary for voluntary compliance.

Secondly, the cascading taxes such as purchase tax, octroi and CST should be abolished. This is important to ensure that India becomes a common market.

Thirdly, the GST should be applied at a low rate (e.g., 5 per cent and 7 per cent recommended by the Finance Commission Task Force). It is difficult to apply a high tax rate comprehensively to all goods and services. A higher rate would give rise to legitimate demands for lower rates or exemptions on necessities. Multiple rates, in turn, would give rise to classification disputes and erode voluntary compliance. A low rate, on the other hand, can become a virtuous circle facilitating its application on a comprehensive base, simple administration and better compliance.

Q.Which countries have gained from GST? What have their models been?
The most successful models of GST are New Zealand, Singapore, Japan and Australia. In Japan and Singapore, the tax was initially levied at 3 per cent. New Zealand witnessed a revenue growth of 45 per cent due to the low rate and simple structure of the tax.

— Satya Poddar is a Partner, tax & regulatory services, Ernst & Young