GST: Birth and Worldwide parity

[dhwnai shah]

“In this world nothing is certain but death and taxes. !!!"
-Benjamin Franklin

Origin of Goods and Service Tax (GST)

One of the most innovative discoveries of the 20^th century in terms of fiscal parlance during the post-war period has been the system of value-added tax (VAT). VAT is also known as the Goods and Services Tax (GST). As the name suggests, VAT is a tax levied on the value added at each stage of the production and distribution cycles. It is charged on the additional value that results from each trade.

The history of GST goes back as early as 1950s when it was first adopted by France. GST was devised by Maurice Laure a French economist and a Joint Director in the French tax authority in 1954 and was first made known in France on April 10, 1954. He originally referred to it as “taxe sur la valeur i.e. value added tax and defined GST/VAT as a consumption tax payable on the goods and services consumed by persons, business organizations, and individuals. The French VAT was a revolution of the current French invention tax and the adoption of GST/VAT by other countries in the world.

Today more than 160 nations across the Globe, including the European Union and Asian countries have implemented GST or VAT (on both goods and services), with some countries having a dual-GST model. For example, Brazil, Canada, and India.

Adoption and Evolution of GST in the World

Since the first introduction of a VAT in France in 1954, it has now been adopted by more than 160 countries around the world. 

The adoption of GST/VAT progressed in two major phases. The first phase took place mostly in Western Europe and Latin America during the 1960s and 1970s. The second phase of GST/VAT occurred in the late 1980s. Thereafter, GST/VAT got to be adopted in some industrialized countries outside the European Union, such as Australia, Canada, Japan, and Switzerland. This phase also witnessed the rapid expansion of GST/VAT in traditional and developing economies, particularly in Africa and Asia. This was facilitated by the key influences of the World Bank and the International Monetary Fund.

Over the years, the GST revenue accounted for a large portion or percentage of total government revenue worldwide. GST/VAT has been adopted by many countries as a result of the growing concern about economic efficiency and tax simplicity in the competitive and integrated world economy.

Adoption and Evolution of GST in India

The history of the Goods and Services Tax (GST) in India dates back to the year 2000 when Mr. Atal Bihari Vajpayee, the then Prime Minister at that time proposed GST and culminates in 2017 with four bills relating to it becoming an Act. A committee was then set up to design a Goods and Services Tax Model for the country. In 2004, Kelkar Task Force on Fiscal Responsibility and Budget Management proposed a nationwide implementation of fully integrated GST.

While presenting the Union Budget of 2007-08, the Union Finance Minister announced the GST launch date as 1st April 2010. However, the lack of political consensus deferred the GST start date several times. On 19th December 2014, the NDA government presented the Constitutional (122nd Amendment) Bill 2014 on GST in Parliament. The Lok Sabha eventually passed the bill on 6th May 2015. On 14th May 2015, the bill was referred to a Joint Committee of both the Houses of Parliament. After incorporating recommendations from the committee, the Rajya Sabha passed the GST Bill on 3rd August 2016.

The landmark moment in the history of modern India came after nearly 18 years of debates, and negotiations among successive Central Governments from different political parties and States and different interested stakeholders. Finally, the GST Act was passed in Lok-Sabha on 29th March 2017. All States and Union territories passed their respective SGST and UTGST Acts by 30th June 2017. Hence the GST implementation date was set as 1st July 2017. It marked the beginning of a path-breaking tax reform in our country.

Evolution of GST in India
GST was enforced in India by way of a Constitutional amendment made in the year 2017. GST has three types of taxes; which are IGST (for interstate sales, revenue collected by center and state), SGST (for intra-state sale, revenue collected by state), and CGST (for intra-state sales, revenue collected by center).

As per the present GST regime, there are multiple slabs of GST rates. This was done to take care of heterogeneous socio-economic profiles. India adopted four-tier GST rates, viz, 5%, 12%, 18%, and 28%, besides there being a zero rate, composition rates, and compensation cess on specified goods. Around 60% of goods are capped under 12% and 18% slab and luxury goods and services have a special rate of 28% to make greater revenues for the States and the Center Government. In certain cases, a fixed levy has been specified (e.g., restaurants, hotels, jewelry, etc) and in some cases, payment of GST has been prescribed under reverse charge where the recipient has to discharge tax liability.

GST imposes multiple return obligations, in addition to obligations pertaining to matching/reconciliation of input tax credit, and e-way bill. Further, compared to earlier tax regimes, exemptions under GST are less.

According to World Bank Report (2018), the tax rates in the Indian GST system are among the highest in the world. What makes the Indian GST system even more complex is the number of different GST rates applicable to different categories of goods and services. To make things worse, petroleum products, power, alcoholic liquor for human consumption, and real estate have been kept outside the GST ambit. With the highest rate of tax as well as the largest number of tax slabs amongst the countries that have implemented GST, India has the most complex GST system.

GST India vs GST in Other Countries

Broad comparison of tax rate structure in India viz-a-viz World.

GST India vs GST France
France is the first country to implement GST. As tax evasion was high, GST was introduced in France in 1954. When the GST has been implemented in France, the tax on Goods and Services tax has been imposed as the indirect tax levy on the manufacture, sale, and consumption of goods as well as services at the national level.

France’s GST model comes up with four rates similar to the Indian GST structure. The standard VAT rate in France is 20%. It applies to most goods and services. The two reduced VAT rates are 10% and 5.5%. The super-reduced rate is 2.1%. France also has some zero-rated goods, the sale of which must still be reported on your VAT return, even though no VAT is charged. The first reduced VAT rate (10%) applies to goods and services like some restaurants, construction and household work, farming and forestry, and passenger transport. The second reduced VAT rate (5.5%) applies to food, gas, electricity, art, cinema and sporting event tickets, and services for the elderly. The super-reduced VAT rate (2.1%) applies to some medicine, newspapers, and magazines. French zero-rated goods and services include intra-community and international transport.

GST India vs GST UK
In the United Kingdom (UK), VAT was introduced in 1973, replacing Purchase Tax, and is the third-largest source of government revenue, after income tax and National Insurance. It is administered and collected by HM Revenue and Customs, primarily through the Value Added Tax Act 1994.

VAT is levied on most goods and services provided by registered businesses in the UK and some goods and services imported from outside the UK. In the UK there are three tax rates including 0%, 5%, and 20% applicable on goods and services. The default VAT rate is the standard rate 20% since 4 January 2011. Most of the goods are covered under 20% tax rates. Some goods and services are subject to VAT at a reduced rate of 5% (such as domestic fuel) or 0% (such as most food and children's clothing).

GST India vs GST China
The origins of the GST in China may be traced to the 1980s, when the country's government replaced its prior system of company taxes with a VAT system. The manufacturing and construction industries were the primary focus of the VAT system, which was eventually expanded to cover the services industry in 1994. There are four separate VAT rates in China: 13%, 9%, 6%, and 0%.

• The sale and import of the majority of goods, the provision of repair, replacement, and processing services, and the leasing of tangible movable assets are all subject to the standard VAT rate of 13%.
• The retail, entertainment, hotels, restaurants, and catering services, real estate and construction, postal service, transport and logistics are subject to rate of 9 %.
• The services pertaining to financial services and insurance, IT, technology, and consulting are subject to tax rate of 6%

From the tax rates prevailing there, it is obvious to guess why China is a strong competitor.

GST India vs GST New Zealand
New Zealand introduced a goods and service tax (GST) on 1 October 1986.  This tax can be characterized as a consumption type value added tax.  It taxes virtually all transactions within New Zealand at one uniform rate initially 10%, but increased to 12.5% on 1 July 1989 and then to 15% from 1 October 2010.

GST in New Zealand is uniquely 'pure' with very few exceptions from the GST base. This resulted in a wider tax base and lower compliance and administrative expenditures. Currently, among the OECD nations, the nation receives the largest tax revenues.

GST India vs GST Canada
With respect to Canada’s model of GST, Canada adopted this system of taxation for the first time in 1991. Initially, the Government faced many backlashes for the new change but today it is one of the countries with smoothest Indirect tax structure. The country governs the taxation regime under three schemes i.e.

• Federal GST,
• Joint federal, and
• Separate federal.

The GST covers practically all of its essential products, with the exception of a few necessities including groceries, housing rent, and medical services. The GST rate in Canada is 5% on supplies of goods and services and in some provinces, there is a harmonized sales tax which is 15%.

Considering the political similarities and similarities in the legal system, Indian leaders choose to introduce dual GST model which is similar to Canadian Model.

GST in Ukraine
VAT was introduced in Ukraine in 1993. Since January 1, 2011, it has been administrated by the Ukrainian State Tax Administration. In Ukraine, a standard rate of tax is applied at 20% There are some of the supplies that are also subject to the lower rates under 0% and 7%.

Usually, GST at a 7% rate is applicable to pharmaceutical products, medicines, and medical equipment whereas 0% VAT is on the export of goods and services.

GST India vs GST Singapore

In April 1994, the nation passed the GST bill with a 3% tax rate. It was intended to reduce inflation while also gaining public favor. The Government committed to the population not to raise taxes for the next five years, which was seen as a key move in boosting consumer spending. Since 2007, the GST rates have climbed to 7%.

The Minister for Finance announced in Budget 2022 that the GST rate will be increased in 2 steps: (i) from 7% to 8% with effect from 1 Jan 2023; and (ii) from 8% to 9% with effect from 1 Jan 2024 which is still significantly less than the GST in India.

GST India vs GST Australia
Going to the far shores, in Australia, The GST was first introduced in 2000 with a tax rate of 10% which is consistent till date. The Australian GST has exemptions on certain essential goods such as fresh food and medical supplies. In Australia, the GST is a federal tax that is collected by the supreme authority and subsequently distributed further among the states in a procedural manner.

GST India vs GST USA
The United States is the only major economy that does not have GST. States enjoy high autonomy in taxation. The US does not have a national sales-tax system. Rather, indirect taxes are imposed on a sub-national level. Each state has the authority to impose its own sales and use tax, subject to US constitutional restrictions. The US is a federal republic where taxes are collected at a separate level from federal, state, and local governments. Here the federal tax rates are between 10% and 39.6% of taxable income while state and local governments are charging the tax from 0% to 13.30% of total taxable income.

GST India vs GST Malaysia
To modernize its taxation system and improve business efficiency, Malaysia replaced its Sales and Service Tax regimes with the Goods and Services Tax (GST) effective 1 April 2015. The supplies in respect of residential property, financial services, childcare and private education services, Healthcare services, transport services are exempt from GST.

Malaysian GST regime has similarities to the Singaporean GST regime and draws input from the Australian, UK, New Zealand and South African GST/VAT.

Requirement of E-waybill and Exemption from the tax in countries over the World.

Based on our research and to the best of our knowledge, unlike India in countries other than India there are no major exemptions from the tax regime.

Further, unlike India, there is no system of E-way bill to track the movement of goods in other countries of the world.

In nutshell

"The best things in life are free, but sooner or later the government will find a way to tax them.!!!"

   -Anonymous

Given the above tax rate comparison, it can be seen that the GST rates are prefixed on an average between 16 to 20 percent. India has somehow taken the cues from this and jotted down a similar pattern.

Ideal taxation systems are as scarce as the ideal scenarios to which they must apply. In an ideal taxation system revenue growth should be enhanced, distributional equity should be promoted and economic efficiency and consumer welfare should be improved.

Indirect taxes are currently in place for most products in India. The Indian Government has worked on its framing for more than a decade. In the Indian GST setup, there are various tax rates and different items are allocated particular slabs in which they fall. Contrary to the practice in other countries, this system has been brought into effect, because of the class divide in Indian society and the plethora of goods and services offered.

While there are some deficiencies in the present GST system, it would be inappropriate to jump to conclusions. While analyzing GST, we have to keep in mind that there are thousands of commercial organizations that are subject to the GST and that different states have their own concerns. To harmonize the needs and requirements of everyone in the world’s second-largest country, we need to ensure that ample time is given to bring things into motion.

The Central Government and the GST council should revisit the GST Act and GST slabs to ensure that the loopholes which are currently existing in the system, which are further impairing the newly established system from achieving its goals are rectified effectively and promptly. The need of the hour is to ensure that the business enterprises are educated about the updated system so that they are able to overcome any difficulties that may arise before them while adapting to the new system.

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