The next administration must swiftly amend ‘unnecessarily complex’, counterproductive GST: 13th Finance Commission chair

  • Recently, Vijay Kelkar (chairman of the 13th Finance Commission) attributed scams in indirect tax regimes to high GST rates; Moots shifted to a single 12% rate, as do most other nations.

Reason for a single GST rate:

  • Simplifying the structure: A single GST rate would streamline the structure, making it easier for businesses to comply with the tax system while also lowering the complexity of classification difficulties.
  • Manufacturing and exports could benefit from a single GST rate since it reduces the cost of many rates and makes the tax system more predictable.
  • Many countries use a single GST rate: In many mature and emerging market economies, a single GST or VAT rate has been successful in optimising tax income and minimising tax disputes. For example, Singapore, New Zealand, the United Arab Emirates, and Japan have chosen a single GST or VAT rate.
  • Addressing GST fraud: High GST rates can make it profitable for criminals to dodge taxes. A single, lower GST rate may lessen the incentive for tax fraud and make the system more transparent.
  • Reducing litigation: A single GST rate may assist decrease litigation linked to classification issues and subjective interpretations of tax rates.

How does the Indian GST model compare with GST in other countries?

ParticularsIndia CanadaUKSingapore
Name of GST in the CountryGoods and Service taxFederal Goods and Service Tax & Harmonized Sales TaxValue Added TaxGoods and Service Tax
Standard Rate0% (for food staples), 5%, 12%, 18% and 28% (+cess on luxury items)GST 5% and HST varies from 0% to 15%20 %Reduced rates- 5 %, exempt, zero rated7% Reduced rates- Zero rated, exempt
Threeshold Exemption LimitRs.40 lakh or Rs.20 lakh, depending on the state and supplyCanadian $ 30,000£ 85,000Singapore $ 1 million
Liability arises onAccrual basis: Issue of invoice ORReceipt of payment-earlierAccrual basis: The date of issue of invoice OR the date of receiptof payment- earlier.Accrual Basis: Invoice OR PaymentOR Supply-earliestCash basis (T/O up to 1.35mn): PaymentAccrual Basis: Issue of invoice OR Receipt of payment OR Supply – earliestCash basis: (T/O up to SGD$1mn): Payment
Reverse Charge MechanismApplies on goods as well as servicesReverse charge applies to the importation of services andintangible propertiesApplicableReverse charge applies to the supply of services
Exempt SuppliesSale of land and completed buildings, certain healthcare and educational services, essential food items, etc.Real estate, financial services, rent (Residence), charities, health, educationMedical, education, finance, insurance, postal servicesReal estate, Financial services, Residential rental

The significance of sharing GST with local bodies:

  • Promoting Cooperative Fiscal Federalism: Sharing GST income with local governments could foster fiscal federalism by guaranteeing equitable distribution of tax revenues across all levels of government.
  • Strengthening their fiscal foundation: Equitable sharing of GST with the third tier of government, i.e., local authorities, would strengthen their fiscal base and allow them to invest in important infrastructure and high-quality public goods.
  • Building Fairness and appropriateness: GST is a consumption tax, and taxpayers should experience immediate advantages from paying their taxes. An arrangement to share GST earnings with local bodies would be fair and acceptable.
  • Improves Local governance: Sharing GST income with local authorities would improve the level of governance provided by local governments as residents’ demand for high-quality public goods increases.

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