COMPARISON OF GST ACT OF INDIA AND AUSTRALIA AND WHAT ARE THE IMPACT AND OVERVIEW

What is a GST IN INDIA?

The Goods and Service Tax Bill /GST Bill, officially known to be The Constitution (122nd Amendment) Bill, 2014, would be a Value added Tax (VAT) to be implemented in India, after became an “ACT” GST stands for “Goods and Services Tax”, and is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at the national level. It will replace all indirect taxes levied on goods and services by the Indian Central and State governments. GST is a comprehensive value added tax on goods and services. It is levied and collected on value addition at each stage of sale or purchase of goods or supply of services based on input tax credit method but without State boundaries. There is no distinction between taxable goods and taxable services and they are taxed at a single rate in a supply chain of goods and services till the goods / services reach the consumer. The administrative power generally vests with a single authority to levy tax on goods and services. It is aimed at being comprehensive for most goods and services. Exports will be zero-rated and imports will be levied the same taxes as domestic goods and services adhering to the destination principle. The introduction of Goods and Services Tax (GST) would be a very significant step in the field of indirect tax reforms in India.

What is a drastic impact of GST in economy of INDIA?

The taxation of capital goods discourages saving and investment and retards productive growth. The ‘flawless’ GST envisages full and immediate credit for GST on capital goods (both buildings and plant and machinery), thereby fully eliminating the incidence of any indirect tax on the capital goods. This enhances the productivity of capital and hence reduces the incremental capital-out ratio. Henceforth introduction of GST would encourage saving and bring new investment in the economy.

Benefit of the GST.

Uniform tax structure: - The difference in the tax structure of different states and the central government greatly increase the cost of doing business. The proposed GST, though dual in nature, envisages a uniform Structure, design and compliance system at all levels of government and across state. This will cut across heavy compliance cost currently borne by corporate’s working in multiple states.

Lower and combined signal tax rate: - Presently, the combined rate of indirect taxes is close to 22%. This marginal rate is applied to very narrow bases on account of a plethora of exemptions. Since economic decisions and compliance behavior are based on the marginal rate, the higher rate the greater the distortion and evasion. Since substantially lower, uniform and combined signal rate of 12 % on all goods and service is being recommended, the economic distortion and evasion of taxes would be considerable reduced.

Gains in GDP:-  A detailed study by task force has shown that implementation of GST across gods and services are expected to provide gains to India’s GDP somewhere within a range of 0.9% to 1.7 % the corresponding change in absolute values of GDP over 2008-09 is expected to between Rs.42,789 crore to Rs 83,899 crore, respectively.

Benefits to manufacturing sectors: - With the coming up of GST manufacturing sectors will earn a lot of benefits. the benefits occur from economic of scale output of sectors including textiles and minerals other then coal, petroleum, gas and iron, organic heavy chemicals industrial machinery for food and textiles, beverages and miscellaneous manufacturing is expected to increase. So may other benefits are also there.  

Division of power between center and the states.

• The constitution has clearly defined the power defined the power of the center and the state in matters relating to taxation. GST being a harmonized structure of the tax would require a judicious distribution of taxes among the two levels of government. Division should be such that both (central and state government) are able to enjoy autonomy to levy and collect taxes. Collision of interest between the centre and the states is quite possible, therefore division of power has to be clear and transparent and unambiguous. Parliament and state legislatures will have concurrent powers to make laws on GST.  Only the centre may levy an integrated GST (IGST) on the interstate supply of goods and services, and imports.Revenue loss to the states.
  Certain states are bound to lose revenue and therefore task force has recommended that the central government should provide a sum of Rs.30,000 crores over the next five year which will be used to compensate the state for revenue loss, if any, and the balance for distribution between the state on the basis of the same formula applicable for tax devolution to the states. There may arise several problems with regard to sharing of this money between the states.
  
  
  TAX CREDIT
  Tax credit would be admissible in both components of GST, CGST and SGST. CGST and SGST are to be treated sparatly for the purpose of tax credit. Structure of tax credit is as under.
  (a) Taxes paid against CGST shall be allowed to be taken as input tax credit for the CGST and could be utilized only against the payment of CGST.
  (b) Taxes paid against SGST shall be allowed to be taken as input tax credit for the SGST and could be utilized only against the payment of SGST.What is a 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.
  The Australian goods and service tax (GST) was modeled on the EU’s VAT system, although at a lower rate and flat rate of 10%. A number of European systems, especially the Scandinavian countries, operate a three or two-tiered system of graduated taxes. The GST was designed to eradicate a number of state taxes and charges and to reduce tax avoidance through the cash economy
  Should we broaden the tax?
  In short: yes. At present, the GST exempts educational services and supplies, fresh food and beverages and some other items. Any form of tax exemption encourages inefficiency and misallocation and adds complexity and transaction costs to a system. As to increasing the rate, in 2011-2012 the GST raised $45,861 million or about 4% of GDP, compared to 7% of GDP raised by VAT taxes in the OECD. By contrast, Australia operates a higher company tax rate (30%) compared to OECD average of 25%.
  The OECD Going for Growth report (2012) argues the low rate of GST makes the Australian system relatively inefficient. There is clearly room to raise the level of the GST but this would need to be offset by reductions in personal and company tax. As well, the rate should be kept flat to avoid distortions in consumption.
  Would it have a significant impact on government revenue?
  This would depend on offsetting reductions in direct tax. However, food and education are significant parts of household and company budgets. OECD estimates would indicate that a target of 7% of GDP would be reasonable. On this basis, GST receipts would need to rise to $80,256 million (2011/12 figures). Given that fresh food accounts for about 7%-9% of household budget, the eradication of exemptions would probably not be enough to generate this. A rate increase would also be required.

  What policy reasons are there to reform the GST?

  The two errors made at the time of introduction were exemptions and a “fixed rate”, whereby the government put strict conditions on any altering of the rate. These both reduced the simplicity and the revenue-raising potential of the tax and made it difficult to use as a policy weapon. As a tax, the GST has the advantage of taxing (to some degree) parasitic industries such as tourism, by at least extracting some revenue directly from tourists. Used properly, it can reduce the cash economy, spread the incidence of tax and give some tax relief to PAYE taxpayers. The immediate issue to face would be the inflation effect on food prices and any distorting effect this would have on interest rates.
  GST / VAT in other countries
  It is dangerous to make direct rate comparisons because some countries operate different rates across various commodities. A VAT should always be placed in the context of the overall taxation mix. Other countries, such as Canada, split their VAT taxes into federal and state taxes. However, these warnings accepted, by way of comparison with reasonably similar systems we have Brazil (17% to 25%); Denmark (25%) Finland (24% but 13% on food), Japan (5%), South Korea (10%), New Zealand (15%); Singapore (7%), UK (20% standard but a significant group such as energy at 5%). Overall, Australia is at the lower end in terms of tax rate and has the added advantage of being flat.