Tax Policy

Goods and Services Tax: an International Perspective

A look into India's economy and their use of a goods and service tax.

Recently, I traveled to India where I encountered a Goods and Service Tax also known as GST. GST and Paytm appeared to be ubiquitous in every retail shop via posters or conversations. Goods and Service Tax, a form of indirect countrywide tax that replaced various other forms of taxes in India, was implemented on July 1, 2017. Other countries such as Australia, New Zealand, Canada, and Singapore have their own versions of GST.

Why was GST needed in India?

Prior to GST, Value Added Tax (VAT) and other forms of taxes were collected by each individual state and then subsequently by the federal government (Center) as well. Duties of Excise, Customs, State VAT, Luxury Tax, Entry Tax, and other forms of taxation were eliminated via the GST legislation. Essentially, these indirect taxes contributed to tax on tax or cascading effect on the manufacturing and sale of goods.

Is GST problem free?

No reform of such magnitude in a $2 trillion economy is free of challenges. Given that the premise of collecting, remitting, and filing GST was to be processed entirely on a digital system, the IT infrastructure and implementation of the GST continues to be a work in progress. More significantly, the rate “slabs” or categories of tax rates for types of goods and services continued to fluctuate as recently as July 2018. For example, the recent rate cut resulted in video games subject to an 18% tax rate from a rate of 28% previously. There are five different categories and items in these slabs which continue to evolve:

  • 0% or No Tax – sanitary items, dairy, fruits, printed books, stamps, and other items are exempt from GST.
  • 5% Tax – domestic air travel in economy class, skimmed milk, cashew nuts, insulin, sugar, tea, and other items.
  • 12% Tax – frozen food products, medicine, instant baking mix, business air travel, handbags, and other items.
  • 18% Tax – most goods and services including pasta, cakes, pastries, detergents, suitcases, refrigerators, vacuums, stoves, oil powder, mattresses, IT and telecom services.
  • 28% Tax – includes items such as dishwashers, automobiles, hair clippers, sunscreen, cement, paint, movie tickets, tobacco, ceramic tiles, and other items.

What is the impact of GST?

On average, $14.2 billion a month was collected in revenue in Q2 2018 from these taxes, which was slightly short of the Government’s overall target. However, the short fall can have precipitous impact by adding to the anticipated budget deficit of 3.3% of GDP in fiscal year 2019. However, with the introduction of e-billing and other collection measures, the overall tax to GDP ratio has been increasing steadily.

Coupled with demonetization, implementation of GST, and enrollment in the the electronic database Adhaar, the reforms in India are poised to create long term fiscal statutory compliance and provide for favorable and predictable markets for domestic and foreign investment.

The results of such reforms remain to be judged over the course of history; however, these initiatives, including GST, demonstrate the efforts of the world’s largest democracy in the world to remain competitive in the global economy.

Stay tuned for more in international tax and accounting issues.

Jeremias Ramos is a CPA working at a nationally recognized full-service accounting, tax, and consulting firm with offices conveniently located throughout the Northeast. Jeremias specializes in tax and business consulting with focus areas in real estate, professional service providers, medical practitioners, and eCommerce businesses.

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