TAX SYSTEM IN INDIA-DEPARTURE FROM OTHER JURISDICTIONS”

“Indian government has structured GST for efficient tax collection, reduction in corruption,

easy inter-state movement of goods etc.1“

“India does not follow an ideal Value Added Tax system. Central sales tax which the central
imposed on the sale of goods from one state to another will continue in the different form
called Integrated GST. One big differentiation between GST in India and GST in other
countries is that, in India two types of GST is charged, hence called as duel GST. Explaining
the impact of GST,” analysts “at Care Ratings cited few reasons. Firstly the impact of
GST on price levels is difficult to ascertain as there are various factors other than tax rates
that drive price levels. The problem plaguing GST is tax evasion arising out of small
businesses, under-reporting of actual sales by traders; traders collecting tax but not remitting
to the government; and traders making false claims for refunds.”

“The tax structure in India is different from other countries as it is payable at the final point
of consumption. Typically, the tax is collected on value-added goods and services at every
point of the supply chain. Being a union of states, India follows dual tax structure that is
different tax schemes for the Centre and states and this will be applied to the GST regime as
well.”

“Also, while other countries have rates in the range of 15-20 per cent, India’s rate is lower as
compared to other countries and ranges between 5-28 per cent.”

1
“Das Gupta, A Central Tax and Administration Reform in the 1990s: An Assessment in Development, Poverty,
and Fiscal Policy [2003].”
 “SUGGESTIONS AND LESSONS FOR INDIA”

“As the Indian economy comes to terms with the new tax system along with a slowing
demand in the economy, here are certain points for it to consider:”

 Singapore”introduced the system in 1994 and saw a spike in inflation soon after the
implementation as the effective tax rate was higher than what prevailed before. 2This
means administrators need to keep a check on the movement of product pricing.”
 The”Canadian government faced resistance internally over the GST law. Therefore,
the government reduced the rate twice after implementation. This means the GST rate
has to be realistic which should not burden the common man and need not required
alteration frequently.”
 “Businesses in Malaysia showed harsh resentment even when the government gave
them 18 months to prepare themselves for the new tax regime. Looking at the
complexity of the Indian GST, businesses need to start early to be GST-ready at the
time of implementation.”As”the Central government has asked businesses to go live
with the new GST within nine months of implementation, it is going to be a
challenging task for all the stakeholders.”
 Meanwhile,”Malaysia also came out with a handbook on tax practices for each
business segment to make the entire system easy to understand. Indian legislative
bodies should also think about similar publication. Since the GST is applicable on
every transaction, India needs to adopt advanced information technology
infrastructure to encapsulate and embed systems which are GST compliant.”
 If”the federal government is to have a sales tax at all, a credit-invoice VAT is probably
the best choice. Single-stage sales taxes either lead to tax cascading, with all their
inefficiencies, if a broad base is maintained, or to high tax rates, complexity, and rent-
seeking, which entail different sorts of inefficiencies, if the base is allowed to be
narrowed. The”former”case persists in Canada through its provincial retail sales taxes,
and the latter case was demonstrated by the sorry history of the Manufacturer’s Sales
Tax.”
 Subtraction”method VAT's run into problems whenever there are goods to be zero-rated,
2
“Harberger, Lessons of Tax Reform from the Experiences of Uruguay, Indonesia, and Chile Duke University
Press [1989].”
 for example exports. As Canada's mounting government debt has necessitated tax
increases, which have, predictably, led to increased attempts at tax evasion, the credit-
invoice method, whilst not perfect in this respect, seems to be the best way to at least
minimize evasion.”When firms evade taxes”by not registering for the GST even though
they are legally obliged to, at least the value-added on earlier stages of the production
process are taxed. If they try to evade taxes by not collecting from customers but still try
to collect input tax credits, they run the risk of auditors discovering discrepancies
between claimed input purchases and output sales.”

The next lesson is regarding zero-rating of goods for vertical equity purposes. The costs of
this are:

 The”efficiency losses from narrowing the tax base and so requiring a higher tax rate on
other goods.”
 The”increased compliance costs to firms as they attempt to navigate their way through
the complex definitions of what exactly is zero-rated and what is not.”
 The”increased rent-seeking activity, by producers of taxed goods who feel that their
product should also be considered a necessity (Canadian authors and publishers have
been particularly vocal in their opposition to the GST's being applied to publications) and
by producers of taxed goods who feel they face unfair competition from producers of
zero-rated goods (for example pizzerias complaint that their product is taxed and frozen
pizzas bought in a grocery store are not).”

Charles”McLure writes that “one can only look to the . . . Canadian treatment of food with
amazement”. The rich buy more basic groceries than the poor do, a simple fact obscured by
the statistic that the poor spend a higher portion of their budgets on food than do the rich. 3“

“For vertical equity what is important is not the progressivity of VAT, but whether the entire
tax and expenditure system is progressive. Canada has a low-income refundable tax credit
with an excellent record at reaching those in need. In the context of developing countries that
reliance on the income tax system to achieve redistribution is often misplaced, and
differential commodity tax rates can be an effective ‘second best’ way of achieving some
vertical equity.”

3
“McLure, Charles E. Jr What Can the United States Learn from the Canadian Sales Tax Debate? Chicago
University Press [1992].”
“The single justification for zero-rating necessities which might apply to developed countries
is that argument used to justify most forms of social insurance: a universal benefit provides
something of a ‘safety net’ to catch those with sudden adverse changes in circumstances.”
There”is a time lag in adjusting the low-income tax credit to an individual's change in
income, but the fact that groceries are zero-rated is a benefit that is always there. Further, the
poor might see the refundable tax credit as a benefit which will decrease over time, in fact it
is already eroding, since the Canadian income tax system is indexed only for any inflation
over 3% and current inflation rates are between 1 & 2% - whilst the zero-rating of groceries
has more permanence.”

“Whether or not this argument is valid, it is worth noting that no public advocates of the poor
have suggested the policy of taxing groceries and increasing the refundable tax credit to more
than compensate the poor, which on the surface appears to be a progressive way for the
currently cash-strapped Canadian government to raise some extra revenue. The third lesson is
about sales taxes in a federal system.”

“Discussing Canada's current dual sales tax system Prof. Richard Bird writes that he has
“increasingly come to think that the only way two levels of government can levy sales taxes
at a reasonable cost is by agreeing on a common tax base and letting one level of government
collect the tax for both”.4“Although,”as mentioned above, it should be possible to allow
provincial governments perhaps some autonomy in setting tax rates, in particular choosing
which goods to zero-rate, it is certainly clear that some system of harmonization should have
been agreed upon before the federal government unilaterally changed its sales tax.”
The”partial harmonization by Quebec and efforts to persuade other provinces to harmonize
have failed, and so an unnecessarily complex system persists.”

4
Bird, “Richard M., Tax Policy and Economic Development Johns Hopkins University Press [1992].”