GST in other countries vs India

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3rd of August turned out to be a historic day for Indian politics. Parliament’s passage of the constitutional amendment bill enabling the Goods and Services Tax (GST) attempts to demolish the silos within which India’s indirect tax system operates and marks an important milestone in the journey to create a common market in India . It turned out to be one of the most complicated reforms in Indian history, with successive governments since 1990s proposing different  features to bring it to the table. However ,its implementation in India still has to overcome many hurdles. GST has been successfully implemented in many countries worldwide like Singapore, Canada. Several lessons can be learnt from those cases which  can guide  India while the bill passes through various stages to simplify the taxation system in India.

The experience in all the countries that have implemented GST indicates that businesses need sufficient time to get ready. The immediate need is for half the states to approve the constitutional amendment which is likely to happen soon. But subsequently Centre and states together have to flesh out the details of GST. India ,though geographically one country is fragmented diversely in  economic  terms .Every transaction across state borders is subject to numerous taxes, which forms a  significant source of revenue for different states. And state governments are demanding different levels of compensation for the amount they stand to lose with GST. A lot of tussle happened  with many states demanding that the GST Council allow them to decree substantial additional levies or exemptions.  This  forms a prerequisite for central government to cater to before successful implementation of GST. Australia  successfully implemented GST as a federal tax ,distributing the tax collected by the centre to  its states. Such  a model  could  be used to solve this issue ,which  is under Indian government’s consideration.  Unlike other countries, GST implementation in democratic country like India is accompanied by political rivalry, with  opposition parties stressing for an assurance that the related GST bills would not be passed as money bills subsequently. This further can lead to delays in implementing the bill. Another major point of conflict is the rate of interest to be charged. A heavy burden lies on the states to make the idea of a uniform tax work. They will constantly be tempted to gain short-term benefits by fiddling with tax rates, ignoring the damage this may do to the idea of one single market. Different committees have suggested different tax bands for different sets of goods and services. One such committee headed by  Chief economic adviser Arvind Subramanian  suggested four tax bands -zero for essentials, 12% for merit items, 17-18% as the standard rate for other items, and 40% for luxuries[1] .Many other opposition parties believe that a standard rate of 18% would make GST non-inflationary .An ideal GST  worldwide would have one tax rate for each item across all states. An example of the same is provided by countries like Singapore ,New Zealand ,who tax virtually everything at a single rate. World over, GST rates are typically between 16 per cent and 20 per cent. Lower rates can help bring down the tax evasion rates ,benefitting the economy in the long run. The governments in other countries started with very low rates of interest, which the Indian politicians are not willing to start with. A case in point is Singapore ,  which started with the lowest rate of 3% in the world in 1994 and gradually increased it to a maximum of  8% over the years[2]. Another distinguishing feature is the huge class of exemptions proposed in the Indian GST model which may distort the tax structure. Alcohol  and petroleum products are being kept outside GST ,with each state free to set its rates. These sectors constitute about 40% of a state’s revenue, and being left out of GST will lead to the same situation  that prevails before GST. In Canada, different rates -including zero rates prevail in different provinces for the same product  and efforts at harmonising the rates have only been partially successful.    Also, most other countries have implemented ideal GST ,with all indirect taxes grouped under one. India  on the other hand ,is going to implement dual GST  with separate central and state level component, which further complicates the  process.  Indian GST would be common across  different business sectors, unlike China where GST was implemented on a sectoral basis. The release of sector specific guidance papers  on tax treatment  occurred in Malaysia  during the GST preparation phase . Indian government could also resort to such publications to ensure steady progress, without any  inhibitions in minds of different Indian industries   towards GST  .On the positive side , learning from the struggle of many big businesses in achieving IT transformation for not  having planned or started early, companies like E&Y are designing softwares to help different companies  smoothly transition their systems  with GST compliance and maintain same pace of operations post GST. The proposed Indian GST model  has numerous distinctive cases of tax categories  ,not found in GST of other countries ,which further increases the complexity of the  transition.

Hence an important notion accepted by most of the GST countries worldwide is that GST will be inflationary in the first few months of its implementation, but smoothens with time to make the system more efficient. India needs to accept this to meet its April 2017 deadline.  A general consensus needs to be arrived at ,considering the benefits of both businesses/firms and the general public.  As the experience in other countries shows, advance planning and extending adequate time to industry, continued dialogues between businesses and administrators, a reasonable tax-rate and timely release of the legislative documents are some of the important measures to aid in smooth GST implementation .GST should not be seen as merely a tax change. It is set to be a business change with far reaching impact on all aspects of an  organisation’s operations including supply chain, IT, HR, finance etc.