Economics project on GST

Done by
TANAY RISHU
1st year
Section-D

INTRODUCTION

Goods and Services Tax is a comprehensive indirect tax on manufacture,

sale and consumption of goods and services to replace taxes levied by
the central and state governments. Goods and Services Tax is to be
levied and collected at each stage of sale or purchase of goods or
services based on the input tax credit method. This method allows GST -
registered businesses to claim tax credit to the value of GST they paid
on purchase of goods or services as part of their normal commercial
activity. Taxable goods and services are not distinguished from one
another and are taxed at a single rate in a supply chain till the goods or
services reach the consumer. Administrative responsibility would
generally rest with a single authority to levy tax on goods and services.

Basically, Goods and Service Tax is that tax credit mechanism wherein
the tax is levied on goods and services at each point of sale or provision
of service. Under this tax regime the seller of goods or the service
provider can claim the input credit of tax paid by him (i.e. input GST) for
purchasing the goods or procuring the service. Thereafter he can utilize
that credit of GST to set off against the amount payable on the supply of
goods or services (i.e. output GST). Precisely, it can be termed as a
consumption tax collected on the value-addition made in the goods and
services at each stage of the supply chain.
Further the peculiarity of this tax structure is that the end consumer,
being the last person in the supply chain, has to bear this tax and so, in
many respects, GST may also be referred to as a last-point retail tax. It is
basically a tax on final consumption.

HISTORY
A quick look into the history of GST around the Globe: -
France was the first country which introduced a comprehensive goods
and service tax Regime in 1954. The Goods and Service Tax (GST) is
proposed to be a comprehensive indirect tax levy on manufacture, sale
and consumption of goods as well as services at a national level. The
GST rate in various countries ranges from 5 per cent in Taiwan to 25 per
cent in Denmark.
In the late 1980s, the federal government of Canada replaced its MST
(Manufacturer’s Sale Tax) with a new value-added sales tax called the
Goods and Services Tax (GST). The basic motive behind this reform was
to introduce a new nationally harmonized sales tax which would replace
individual provincial sales taxes (PST), and both the levels of
government would share the revenues generated there from.
Subsequent negotiations to harmonize the provincial and national sales
taxes proved unsuccessful for the Canadian Government. Various
provinces challenged the introduction of national sales tax on the
ground that the federal government was exceeding its constitutional
powers by operating in a taxation field historically reserved for the
provinces. But as a result of constructive efforts by the Canadian
Government National Sales Tax was implemented in 1989-90.
In Australia It was introduced by the Howard Government on 1 July
2000, replacing the previous Federal wholesale sales tax system and
designed to phase out a number of various State and Territory
Government taxes, duties and levies such as banking taxes and stamp
duty. This proved a milestone in the taxonomy of Australia.
 Today, it has spread to about 150 countries.

No. Region No. of Country

1 ASEAN 7

2 Asia 19

3 Europe 53

4 Oceania 7

5 Africa 44

6 South America 11

7 Caribbean, Central & North America 19

Difference between VAT and GST

In earlier times, the tax was levied on the value of sales of goods
(or even on services). It was simple but the problem was that Sales
Tax will also be levied on the taxes which are already levied on the
goods used for making the final product. For example, if you
manufacture something for $100 using inputs of $ 50 and
presume the tax rate to be 10%, you have suffered $10 on the final
product plus you have suffered $ 5 on the inputs. In your case your
value addition has been only $ 50. Hence the tax has actually
become 30% rather than 10%. Even if you exclude the input tax,
you end paying tax @ 20% on your value addition. If suppose your
value addition would have been only $10, your sales-tax would
have been same and effecitvely you had paid the sales tax @
100%.
This is called cascading effect.
Hence the concept of VAT became more popular where you pay
tax only on the value addition i.e. $50. This is achieved by giving
you credit of $ 5 on inputs which you can use for making payment
to your finished goods of $ 10. Hence you pay only the difference
i.e. $5 which is exactly the 10% of value addition.
The true VAT can take place only when all goods and services are
taxed at the same rate. This rarely happens in real life because
there are always different tax-rates for different goods and services.
Hence what you pay is always less or more than the % of value
addition. For example, if suppose that half of the input in above
example was taxed at 5%, your credit will be $ 2.5 + 1.25=3.75 and
hence your payout will be $ 6.25 for the value addition of same
$ 50, which is actually 12.5% of value addition.
GST is another name of VAT but it taxes both goods and services
at the same rates. It eliminates many disputes which arises due to
taxing goods and services seperately.

Goods Services Interchangeability

The main purose of GST is to eliminate the dispute of taxing goods
and services separately. Nowadays services are sold with goods
(e.g. warranty) and goods are sold with services (e.g. SIM card).
While our commonsense tells us that goods are services are totally
distinct, in reality, you can sell all goods as services and evade
taxes. For example, instead of selling a car (as goods), you can sell
the car on lease for 10 years (as service) and save the taxes if
service is not taxed or taxed at a lower rate.

GST is expected to eliminate all such disputes because all

transactions shall be taxed at the same rate and no distinction is
made between goods and services.
GST IN INDIA
Introduction
The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014,
seeks to amend the Constitution of India to facilitate the introduction of Goods
and Services Tax (GST) in the country. The proposed amendments in the
Constitution will confer powers both to the Parliament and the State
legislatures to make laws for levying GST on the supply of goods and services
on the same transaction.

Rationale behind moving towards GST:

1. Presently, the Constitution empowers the Central Government to levy excise
duty on manufacturing and service tax on the supply of services. Further, it
empowers the State Governments to levy sales tax or value added tax (VAT) on
the sale of goods. This exclusive division of fiscal powers has led to a
multiplicity of indirect taxes in the country. In addition, central sales tax (CST)
is levied on inter-State sale of goods by the Central Government, but collected
and retained by the exporting States. Further, many States levy an entry tax on
the entry of goods in local areas.

2. This multiplicity of taxes at the State and Central levels has resulted in a
complex indirect tax structure in the country that is ridden with hidden costs for
the trade and industry. Firstly, there is no uniformity of tax rates and structure
across States. Secondly, there is cascading of taxes due to ‘tax on tax’. No
credit of excise duty and service tax paid at the stage of manufacture is
available to the traders while paying the State level sales tax or VAT, and
vice-versa. Further, no credit of State taxes paid in one State can be availed in
other States. Hence, the prices of goods and services get artificially inflated to
the extent of this ‘tax on tax’.
 3. The introduction of GST would mark a clear departure from the scheme of
distribution of fiscal powers envisaged in the Constitution. The proposed dual
GST envisages taxation of the same taxable event, i.e., supply of goods and
services, simultaneously by both the Centre and the States. Therefore, both
Centre and States will be empowered to levy GST across the value chain from
the stage of manufacture to consumption. The credit of GST paid on inputs at
every stage of value addition would be available for the discharge of GST
liability on the output, thereby ensuring GST is charged only on the component
of value addition at each stage. This would ensure that there is no ‘tax on tax’
in the country.

4. GST will simplify and harmonise the indirect tax regime in the country. It is
expected to reduce cost of production and inflation in the economy, thereby
making the Indian trade and industry more competitive, domestically as well as
internationally. It is also expected that introduction of GST will foster a common
or seamless Indian market and contribute significantly to the growth of the
economy.

5. Further, GST will broaden the tax base, and result in better tax compliance
due to a robust IT infrastructure. Due to the seamless transfer of input tax
credit from one stage to another in the chain of value addition, there is an
in-built mechanism in the design of GST that would incentivize tax compliance
by traders.

Salient features of proposed GST:

Dual GST: Both Centre and States will simultaneously levy GST across the
value chain. Tax will be levied on every supply of goods and services. Centre
would levy and collect Central Goods and Services Tax (CGST), and States
would levy and collect the State Goods and Services Tax (SGST) on all
transactions within a State. The input tax credit of CGST would be available for
discharging the CGST liability on the output at each stage. Similarly, the credit
of SGST paid on inputs would be allowed for paying the SGST on output. No
cross utilization of credit would be permitted.

Central Taxes to be subsumed:

 i. Central Excise Duty

 ii. Additional Excise Duty
 iii. The Excise Duty levied under the Medicinal and Toiletries Preparation Act
 iv. Service Tax
 v. Additional Customs Duty, commonly known as Countervailing Duty (CVD)
 vi. Special Additional Duty of Customs-4% (SAD)
 vii. Cesses and surcharges in so far as they relate to supply of goods and
services.

State Taxes to be subsumed:

 i. VAT/Sales Tax
 ii. Central Sales Tax (levied by the Centre and collected by the States)
 iii. Entertainment Tax
 iv. Octroi and Entry Tax (all forms)
 v. Purchase Tax
 vi. Luxury Tax
 vii. Taxes on lottery, betting and gambling
 viii. State cesses and surcharges in so far as they relate to supply of goods
and services.

All goods and services, except alcoholic liquor for human consumption, will be
brought under the purview of GST.

The GST Advantage

As the Rajya Sabha prepares to pass the constitutional amendment

paving the way for the goods and services tax (GST), the reform is
expected to bump up GDP by about a percentage point or even more.
Here's a look at GST's benefits.

1. Life gets simpler

GST will replace 17 indirect tax levies and compliance costs will fall

2. Revenue will get a boost

- Evasion set to drop - Input tax credit will encourage suppliers to pay
taxes - States and Centre will have dual oversight - The number of
tax-exempt goods will decline

3. A common market
It's currently fragmented along state lines, pushing costs up 20-30%
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4. Logistics, inventory costs will fall
Checks at state borders slow movement of trucks. In India, they travel
280 km a days compared with 800 km in the US

5. Investment boost
For many capital goods, input tax credit is not available. Full input tax
credit under GST will mean a 12-14% drop in the cost of capital goods.
Expected: A 6% rise in capital goods investment, 2% overall.

6. Make in India
a) Manufacturing will get more competitive as GST addresses cascading
of tax, inter-state tax, high logistics costs and fragmented market b)
Increased protection from imports as GST provides for appropriate
countervailing duty.

7. Less developed states get a lift

The current 2% inter-state levy means production is kept within a state.
Under the GST national market, this can be dispersed, creating
opportunities for others
8. Manufactured goods could become cheaper Lower logistics and tax
costs

9. GDP lift HSBC estimates an 80 basis point rise in GDP growth over 3-5
years. NCAER pegs this at 0.9-1.7% thanks to the elimination of tax
cascading

10. Freeing up online State restrictions and levies have complicated

ecommerce. Some sellers do not even ship to particular states. All this
will end with GST

Potential Pitfalls Once the Upper House passes the amendment, there's
a long way to go and much work to be done before the government's
April 1, 2017, deadline can be met. Factors that could trip up GST:

- The actual regime may not be the best possible - Too many
exemptions could undermine the levy - Goods like petroleum, alcohol
and tobacco may be excluded - A high tax rate would stoke inflation as
service taxes will rise more steeply - Fiscal stress if expected collection
efficiency doesn't materialize early.
GST IN AUSTRALIA

The goods and services tax (GST) in Australia is a value added tax of
10% on most goods and services sales. GST is levied on most
transactions in the production process, but is refunded to all parties in
the chain of production other than the final consumer.
The tax was introduced by the Howard Government and commenced
on 1 July 2000, replacing the previous federal wholesale sales
tax system and designed to phase out a number of various State and
Territory Government taxes, duties and levies such as banking taxes
and stamp duty.
An increase of the GST to 15% has been put forward, but is generally
lacking in bi-partisan support.

Legal framework
 All Australian businesses whose turnover is above the minimum
threshold (currently $75,000 per annum) are required to register for
GST. Businesses whose turnover is below the threshold may register
if they wish to.
 A GST-registered business must charge its customers GST on taxable
goods and services it provides, but is entitled to a credit for any GST
it has paid for its expenditures on these goods and services as well
as capital purchases (called input tax credits). A registered business
must periodically lodge Business Activity Statements (monthly,
quarterly or annually), and at the same time pay the net amount of
GST owed to the tax office (if more GST is paid than collected, a
refund is paid by the tax office instead).
 Some goods and services (notably salaries, wages, fresh food, and
real estate) are exempt from GST. Other goods and services (rental
income and financial services) are "input-taxed", which means that
GST is not charged on the sale, but GST paid by that part of the
business is not eligible to be claimed as an input tax credit.[6]
 Division 9 of the A New Tax System (Goods and Services Tax)
Act 1999 (Cth) (GST Act) stipulates that GST is applicable to a supply
 of goods, services and transactions related to real property,
obligations or rights. The supply must be for consideration (GST Act
s9-15) to a relevant entity registered for GST (Div 23) in the course
of enterprise (s9-20). This does not include employment or hobby
income.
 Taxable supplies include goods wholly within Australia, from or to
Australia or real property in Australia. Certain types of supplies are
free of GST, examples include fresh unprocessed food, medical
services, education courses, childcare, exports, pre-owned real
estate and going concerns. When an enterprise purchases goods or
services to be consumed or used for resupply to an end customer
they may receive a refund (input tax credit) on the amount of GST
contained in the price (Div 11), which means in effect no GST is paid
on those supplies.
 New residential and commercial properties are subject to GST but
re-sale of existing properties is not. All real estate agent fees on
either new or second-hand property are subject to GST. Processed
foods such as biscuits, soft drinks, restaurant meals and take-away
foods are also subject to GST.
 Registered enterprises for GST must complete a Business Activity
Statement (BAS) for reporting to the Australian Taxation Office for
each quarter ending March, June, September and December.
Businesses must lodge their Statements with the ATO within twenty
working days of the end of each quarter.

Comparing New Zealand and Australia's goods and services

tax (GST) systems

New Zealand Australia

GST is a tax of 15% on all goods, services GST is a broad-based consumption tax. It
and other items sold or consumed in New was introduced on 1 July 2000 and
Zealand. replaced a wholesale sales tax.

You become liable to pay GST when your The GST rate is set at 10% of the price of
annual turnover exceeds NZ$60,000 in any the goods being sold or services being
12-month period. supplied, where GST is applicable.

Depending on your turnover, you can elect to GST refers to either the "value" of a
file returns monthly, two-monthly or taxable supply or the "price":
 six-monthly.
 The value of a taxable supply is
Find out more about GST the GST-exclusive consideration
payable for the supply.
 The price is the GST-inclusive
consideration payable for the supply.

GST is 10% of the value of the supply and

is included in the sale price of a taxable
supply.

When is GST not payable?

New Zealand Australia

Certain goods and services are not liable
for GST. These are:
 Exempt supplies which include
supplies of residential accommodation
and many financial services such as
paying and collecting interest.
 Zero-rated supplies which are
taxed at the rate of 0% but are still
shown on a GST return.
 Special supplies which are
different from the normal business
sales or purchases.
Some transactions are outside the
scope of GST, for example, gifts made
by people who are unregistered or
have no connection with Australia.
Others are GST-free which means
there is no liability for GST on the
supply but the supplier can claim
credits for GST on the acquisitions it
has made, for example:
 specified exports
 health
 food
 education
 international travel, and
 certain charitable activities.

GST IN MALAYSIA
The Goods and Services Tax (GST) is a value added tax in Malaysia.
GST is levied on most transactions in the production process, but is
refunded with exception of Blocked Input Tax, to all parties in the chain
of production other than the final consumer.
The existing standard rate for GST effective from 1 April 2015 is 6%.
GST is charged and collected on all taxable goods and services produced
in the country including imports. Only businesses registered under GST
can charge and collect GST. GST collected on output must be remitted
to the government. However, businesses are allowed to claim the input
tax credit through the following mechanism and method.

 GST collected on output (output tax) is deducted against

the GST paid on input (input tax)
 If there is excess, the amount shall be remitted to the
government within the stipulated period
 If there is deficit, business can claim for refund from the
government
In principle, GST is imposed on all goods and services produced in the
country including imports. However, certain basic foodstuff likes rice,
sugar, flour, cooking oil, vegetable, fish and meat, eggs and essential
services such as health and private education, public transportation,
residential property and agriculture land are not subject to GST. Such
exemption is to ensure that the lower income group is not burdened by
GST.
The government has decided that the Royal Malaysian Customs
Department (RMC) manages and administers the GST to be
implemented in Malaysia.

The government had given the businesses samples time to be ready for
GST implementation. GST awareness and education programmes will be
conducted on an on-going basis until the GST is implemented. In its
effort to disseminate GST information to the general public, the
government has set up a Customs call centre which will be operational
at Kelana Jaya, Selangor. In addition, various industry guides will be
issued as guidance to the industries relating to the GST treatment and
procedure pertaining to specific industries.

The main aim of the government in introducing the GST was to make
the tax system more effective, efficient, transparent and business
friendly. Basically, the imposition of the GST at the rate of 6% will not
bring about increase in revenue of RM1.0 billion. The increase in
revenue will be realized by having an effective and efficient GST system
where there is increase in tax compliance and the resurfacing of
businesses from the informal sector. Apart from this, the government
will also institute various fiscal measures to increase the national
revenue.

How the GST impacts Agriculture and

Manufacturing sectors of the economy?
Here’s a brief look at how the GST impacts some sectors of the
economy.

Agriculture: In many developing countries, GST is helping in making the

agriculture market more efficient as all the taxes are subsumed under a
single rate, making the movement of agricultural commodities across
states hassle-free. Transportation time and wastage, especially in case
of perishables, will come down.

Manufacturing: The removal of cascading taxation brings down

production costs. Easy movement across state borders as it will be in
case of India will make the process of supply and transportation of
finished products, and raw materials, among others, hassle free.
GST IN FOOD INDUSTRY - understanding the
applications
India should learn from the experiences of countries such as the UK,
Canada and Australia that have used low taxes to streamline the
agro-supply chain.

On a global front, most countries tax food at a lower rate, keeping in

view the considerations of fairness and equity.

Countries such as Canada, UK and Australia where food constitutes a

relatively small portion of the consumer basket, food is taxed at zero
rate. In other countries, food is taxed at a standard rate which is as low
as 3% in Singapore and Japan at the inception of the GST.

Even in international jurisdictions, no distinction is drawn on the degree

of processing of food. Hence, the benefit of lower or zero tax rates
should also be extended to all food items in India regardless to degree
of processing.

New Zealand’s system of GST is one of the best in the world because
it has only one tax rateand that rate applies to almost everything. We
do not have the absurd situation that exists in some countries where,
for example, bread has no GST,chicken has no GST, but a chicken
sandwich does have GST. Or the situation where the chicken
sandwich attracts GST if it is served warm, but not if it is served cold.

Policy makers in New Zealand wisely decided that the administrative

and compliance costs of having selected goods and services exempt
from GST would be too high.

Another reason for levying GST on as wide a range of goods and services
as possible is that the wider the tax base, the lower rate of tax required
for any given amount of tax revenue. Removing GST on all food
would imply that GST on other goods and services would need to rise to
realise the same amount of revenue. This would strengthen calls for
its removal on other basic goods and services. The GST system would
become progressively more complicated and more open to cheating
and avoidance. So why not get rid of GST completely?

Many people believe that by removing GST on food, food prices will
drop by the full extent of the tax. There are three reasons why this
would not happen.

1. The diagram shows the standard demand and supply curves

familiar to any secondary school economics student. As prices
fall demand rises, so the demand curve slopes down. The
supply curve slopes upward because higher prices make it more
profitable to produce.

Removing accommodity tax such as GST is akin to a shift in the supply

curve. As far as consumers can tell, prices fall for any given quantity
supplied. The market moves from A to B. Note though, that while
the price paid by consumers falls,it does not fall by the full amount of
the tax. The extent of the fall depends on the slopes of the curves.

1. GST could be removed from the price paid by the consumer, but it
would still exist on the prices of goods and services bought by
food producers. Even the last link in the product chain “ the
supermarket or green grocer“ would still be paying GST on their
 inputs. So although they wouldn’t charge GST on food sold to
final consumers, they would still have to recover the cost of the
GST that they pay on their inputs. Thus the price reduction to
the consumer would be very small. The government
could reimburse all GST paid by sellers (making them
zero-rated rather than GST- exempt), but while this would
generate a bigger price reduction, it would be even more
expensive, to say nothing of greater opportunities to cheat the
system.
1. Even if there is some reduction in food prices, there would be
nothing to stop food retailers from rebalancing prices, in effect
taking some of the potential price reduction in food prices and
applying it to other products instead. This becomes more likely
when food actually has to be defined. Does wine count? What
about fast food?

So a broad based GST is a good idea for reasons of economic efficiency,

compliance costs and avoidance potential. Furthermore, removing GST
on food is unlikely to generate much of a price reduction. That leaves
the anti -GST on food lobbies with only one argument;that GST on food
makes people less likely to have a healthy diet as they cannot afford
good food. (Whether a diet based on good food is actually more
expensive than one based on bad food is highly doubtful, but that is
beyond the scope of this article.)

There are two issues here poverty and choice. When GST was
introduced income taxes and benefit rates were adjusted to ensure that
consumers were not made worse off. Indeed, even if the offsets were
exactly one for one, the fact that the economy as a whole has a better
tax system means that its growth should be higher, ultimately
translating into a higher standard of living. Having said that though, if
high food prices are of concern, the best means of immediate help is via
lower income taxes, not abolishing GST on food. Lower income taxes
gives consumers more choice about how they allocate their tax cut
between food and other goods and services.
Removing GST on food may look like assistance to cash-strapped
consumers, but in the long term we will all feel the adverse effects of a
less efficient tax system.

BIBLIOGRAPHY
I have made the project taking help from the following websites:

 Wikipedia.com

 Caclubindia.com

 gst.customs.gov.my

 Dor.gov.in

 Researchgate.net