GST was introduced by the Indian government to reduce tax evasion and build up a strong tax collection structure. One of the major characteristics of GST is that it supports the domestic traders to face the competition in domestic as well as the international market. Here we will analyze how smoothly the GST transition can take place, and the lessons learned from countries which have already implemented GST. GST was first introduced in France. Some other countries which adopted the GST regime are Singapore, Malaysia, and the UK.
In the given scenario, India can learn a lot from these countries as to how GST can be smoothly launched and other post-implementation points to be taken care of.
The first and foremost point of importance is the implementation of the new tax regime. It is the duty of the government to ensure the smooth implementation and migration procedures. Such procedures are required to be made keeping in mind the objective of a smooth transition. Enough information must be supplied to the taxpayers about the implementation and their role in the process.
If there is a lack of communication on the part of the government, then the implementation can face a backlash from the people, leading to unnecessary chaos and confusion. This happened in the case of Malaysia, where the government provided a long transition period of 1.5 years and still faced a backlash from the people.
India has adopted the Canadian model of Dual GST, where tax is charged at federal as well as state levels. In many countries, this segregation is not defined and only one tax applies. This dual tax system might result in further complications as different states are free to draw their interpretations and define their rules regarding such state taxes.
High Tax Rates
In order to expand the tax base, it has been advised to lower the tax rate. A low tax rates encourage the taxpayer to come forward and register. On the other hand, if the tax rates are on the higher end, taxpayers feel discouraged and this will result in tax evasion.
This is the reason many countries like Singapore introduced lower tax rates in the initial stages of implementation of GST and gradually increased them to build up the tax base.
However the Indian government has set the tax rates at 5%, 12%, 18% and 28%, and only staple foods are excluded from the criteria. The government is taking a bold step by not opting for a safe option.
All Taxpayers are the Same
Under the GST, all the taxpayers including small, medium and large enterprises are equated as the same and are taxed at the same rate. Even the exemption threshold is kept very low at 20 lakh, which results in bringing them all at par. It is a good thing as it expands the tax base, but it poses many difficulties for SMEs to comply with all the provisions with their limited resources. This is the reason countries have set the threshold limit at higher levels, for example, in Singapore this limit is at 4.8 crores and in Malaysia, it is at 75 lakhs to give some relief to SMEs.
These SMEs are granted some relief in the form of the Composition Scheme, but it comes with its share of shortcomings, as any taxpayer registered under the same cannot avail input credit, nor can they collect taxes from their customers.
Effective System of Payment
In order to ensure proper working of any tax system, the most crucial part is that it has clearly defined procedures and a fast credit payment system. An effective payment system and a related infrastructure are required for this purpose. In absence of which, proper cash flow will be adversely affected.
In the current GST regime, if there is any delay on the part of the supplier in the filing of the return, then the recipient cannot receive input credit on time. It will, as a result, increase the cost of business for such recipient.
Indian tax regulators should take a lesson from other world economies who have suffered the same issues and introduce a more effective mechanism.
The government should take effective steps to ensure that implementation of GST does not result in inflation. The main objective of the introduction of GST is to eliminate the tax on tax effect, thus reducing the costs of goods and services. But many people may take unlawful routes to exploit the final consumers who are not well aware of these provisions.
It is the responsibility of the government to make precautionary anti-profiteering policies to protect such consumers of goods and services. This is very important as many countries faced the same problem as did Singapore when it introduced GST in 1994; a hike in the inflation rate was noticed.