Article
Disadvantages / Possible Distortions of Implementation of GST
Proposed GST is not a national unitary / centralized tax but a tax to be levied by both, states and the
union simultaneously.
In GST proposed GST-
(a)
There is a retrograde move to extend GST to stock transfer by first
charging on it and then giving credit. The states have forced their way
in this decision which will cause a lot of impairment in work against
the wishes of the Centre. It will involve tremendous work with no
revenue gain. Even if certain amounts are given credit after initial
payment of duty, the money has to be brought out from other circulations
and to that extent the economy will become slower.
(b)
On import, a countervailing (CV) duty of 27 per cent, which is said to
be revenue neutral rate for IGST, is to be paid which is substantially
higher than before. Earlier, service tax was not to be included in CV
duty, but now that also is included in the IGST (integrated GST).
Charging such higher duty is economically regressive. Government may
have to lower the whole rate for countervailing duty which has not been
indicated.
Following disadvantages and possible distortions are note worthy -
Not using the correct accounting method.
Incorrectly claiming GST credits on bank fees
Incorrectly claiming GST credits on government charges --such as land tax, council rates, water rates.
Incorrectly claiming a GST credit on the 'total cost' of a business insurance policy.
There's
a stamp duty component in the premium which is not subject to GST, a
GST credit cannot be claimed on this portion of the payment.
Not remitting GST on some government grants and incentives which are received inclusive of GST
GST is not paid on the sale of cars and equipment including the trade of motor vehicles.
Incorrectly claiming GST credits on wages and superannuation payments.
Incorrectly claiming GST credits on GST-free purchases such as basic food items, exports and some health services.
Incorrectly
claiming the full amount of GST credits on entertainment expenses where
the business has elected for fringe benefits tax purposes to use the
50/50 split method, in which case only 50% of the input tax credits can
be claimed.
Claiming the entire GST credits on a car purchased for more than the luxury car limit.
Sole
traders and partnerships are not apportioning input tax credits and
making adjustments to expenditure that's partly private and partly
business use.
Incorrectly claiming an upfront GST credit on assets
financed through a commercial hire purchase (CHP).While an up-front GST
credit is available for businesses accounting for GST using the
accruals or invoice basis,
Incorrectly claiming GST credits on
payments for Yellow Pages advertising. If the business chooses to pay
for the cost of advertising by installments.
Claiming a GST credit
when the business does not have a valid tax invoice at the time of
lodging the Business Accounting Standards.
Pre-requisites for GST an Efficient GST
A smooth and efficient GST system should possess the following pre-requisites:
harmonization of tax base, tax rates, tax laws and procedures
avoiding cascading effect by providing credit of total amount of tax paid on inputs
levying tax on destination basis
ensuring uniformity in law and procedure
GST regime should also consider the following to be an effective and efficient tax:
the fiscal autonomy of provinces
use of tax as an instrument to achieve social and or economic objectives
risk and rewards of ownership of the tax.
Following can, therefore, be identified as the pre-requisites as a curtain raiser for entering into a GST regime :
Setting up of empowered committee for GST (like VAT) which can steer the road map into action
Broaden the tax base for excise duty (presently 40% comes from petroleum products)
Finishing area based and product based exemptions
Rationalization of concessions and exemptions including that on exports
Expanding service tax to almost all services
Common/unified tax rate for goods and services which may be ideally, revenue neutral (a suitable GST rate)
Avoiding or minimizing differential tax rates
Abolition of other small taxes
Abolition of CST in a phased manner
Power to levy service tax on select/agreed services to States
Issue of inter-State services and goods movement vis-a-vis levy of duty or tax to be sorted out
Revenue sharing mechanism to be rationalized
Centre should be enabled to tax value added upto retail stage.
While
GST may be seen as national VAT system on goods and services, states
sales tax shall eventually cover all states to have state level VAT
system for sales etc.
GST, if implemented, would end up
prevailing distortions in goods and services taxation in term of money
and scope. It will also result in lowering of cost of compliance,
enhancing compliance levels and result in higher tax collections. It
would offer a wider tax base and reduce revenue leakages. Industry would
be a happier lot as it would allow them to avail
Cenvat
credit on inputs and input services, besides eliminating other small
taxes, making compliance cheaper and simpler. GST shall achieve
economies of scale by creating a common market and help India become a
global market. All states and centre will have to work for this unified
goal.
GST is
expected to be a more efficient system of taxation and is likely to give
a boost to the tax revenue of the Centre and the States. GST will also
remove barriers amongst the states and convert entire country into a
common market. Once implemented, GST is expected to bring about a
paradigm shift in the arena of indirect taxation in India.