Approximately 160 countries across the world have some form of value added tax (VAT) or goods and services tax (GST). However, varying degrees of success in implementation in various nations makes it crucial for the Centre to be prepared for possible challenges which may crop up after July 1.
Last month, the Reserve Bank of India (RBI) released a report stating that international experience points to some risks — related to tax evasion and avoidance — which are likely to come alive post GST implementation. The RBI enumerated the risks: “Small businesses may not register; a trader may under-report actual sales; traders may reduce their liability by exaggerating the proportion of lower tax slabs; tax authorities need to guard against traders who collected tax but were not remitted by the government; traders may make false claims for refunds.”
Similarly, on December 4, 2015, the Chief Economic Advisor (CEA) Arvind Subramanian released a report where he tried to comprehend the ‘ambition’ of the ‘Indian GST experiment’ by comparing it with other large federal systems such as the European Union, Canada, Brazil, Indonesia, China and Australia. According to the CEA, most of these countries have been facing serious challenges.
The CEA, in the ‘Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (GST)’, stated his conclusions: “They are either overly centralised, depriving the sub-federal levels of fiscal autonomy (Australia, Germany, and Austria); or where there is a dual structure, they are either administered independently creating too many differences in tax rates that weaken compliance and make inter-state transactions difficult to tax (Brazil, Russia and Argentina); or administered with a modicum of coordination which minimises these disadvantages (Canada and India today) but does not do away with them.”
The last month’s RBI report, titled ‘State Finances: A Study of Budgets of 2016-17’ talked about the GST experiences of countries such as New Zealand, Canada, Singapore, Australia and Malaysia. About Canada, the RBI stated that since some of the provinces impose their own sales tax besides the GST, it creates price distortions in the economy.
In Australia, the GST is collected by the federal government and redistributed to the six states and two territories according to the amount recommended by the Commonwealth Grants Commission (CGC) on the basis of the principle of horizontal fiscal equalisation (HFE). “The aim is to achieve equality in the provision of services and infrastructure; however, it often causes friction between the states when the GST revenue is divided. The effective veto that Australian states and the commonwealth enjoys makes any GST reform difficult to achieve,” the RBI noted.
Malaysia’s GST had been on the table since 1989, but it was introduced only in 2015 after intensive debate on its potential merits and shortcomings. “Lingering doubts on the country’s preparedness for the introduction of GST led to some delay in its implementation even though the standard rate (at 6 per cent) is relatively low compared to the VAT rate in other ASEAN countries,” the RBI stated.
Brazil, Argentina and Russia have independent VATs at the Centre and the states. About these three countries, the 2015 CEA report stated: “Differences in base and rates weaken administration and compliance, and inter-state transactions difficult to manage.”