VAT was the first step in the tax reform process. Goods and Services Tax(GST) is likely to mark a transition from existing, origin-based tax policy to destination-based tax policy. India is planning to implement a dual GST system where Central GST (CGST) and State GST (SGST) can be levied on taxable value of a transaction.
Under new laws, there will be no distinction between goods and services. And by amalgamating a large number of Central and state taxes, the new tax law will mitigate cascading or double taxation in a major way and pave way for a common national market. GST implementation will not only remove interstate taxes but also harmonise the entire tax structure by making the administration uniform across various states.
New tax structure proposed
Below is the new tax structure of various taxes which come under CGST and SGST.
GST structure across the world
There is no single model for GST implementation across the world. China and Australia have a single centrally-imposed GST/VAT while Canada and Brazil have dual GST system. There are also countries in the world like US which doesn’t have either GST/VAT. So, Empowered committee of Ministers which has taken these into consideration and recommended dual GST, though unique, is similar to Canada’s.
GST of Canada
Canada’s government imposes 5 per cent sales tax for all goods and services as GST. There is an additional component of 8 per cent to 10 per cent, pushing the entire tax rate between 13 and 15 per cent based on province. In other words, Canada has differential tax rate for states. In India also there are states like Gujarat and Maharashtra which fear, implementation of GST will reduce their tax revenue. The model like that of Canada will help in getting much needed support of opposing states, which will help Central government in pushing the reform.
Canada also has a reporting period of monthly, quarterly or annually based upon the level of taxable supplies made. It also has a strong penalty law of 1 per cent of outstanding balance and additional 0.25 per cent for each month for a maximum of 12 months period. India could implement similar laws which will result in timely reporting of revenues as well as imposing strict penalties for improper functioning of industries.
GST of Australia
While Canada has proven success in dual tax system, Australia successfully implemented single tax GST system. The single GST rate is 10 per cent throughout the country irrespective of state of jurisdiction.
GST law of Australia allows good degree of autonomy where, both group registration as well as branch registration are possible. Under group regstration, group of related entities can form a GST group, whereas in branch registration, each branch of a company forms a GST branch. These regulations can increase the efficiency of GST tax collection and can be followed by India. Implementation of these regulations, though difficult, will make the tax collection process seamless and more efficient.
What is common across all countries which have implemented GST is its export - friendliness. Exports in Australia are GST-free subject to the condition that goods must be exported within 60 days. This ensures goods are exported within specified time limits. India should adopt a similar provision.
If India successfully implements GST and establishes a proper law for the same, we can expect higher flow of investments in coming years. Let us look forward to this!