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Public Economics

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13 views5 pages

Public Economics

Uploaded by

kananverma100
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Public economics

UNIT 2 (GST)

 WHAT IS GST ?
According to CAG Report 2019;
 GST is a tax on supply of goods or services or both and a single tax on
entire value chain of supply, right from the manufacturer to the
consumer.
 GST is a consumption based tax i.e. tax accrues to the State where goods
and / or services are finally consumed.

 BACKGROUND OF GST
 The recommendation for the adoption of GST came first from an Expert
Group on Taxation of Services (Chairman: M. Govinda Rao; India, 2001)
which was taken on board in the Report of the Task Force on Indirect
Taxes (Chairman: Vijay Kelkar; India, 2003).
 Implementation of GST finally materialised with the Parliament passing
the Constitutional Amendment Act in September 2016, followed by the
State Legislatures and GST was rolled out with effect from 1 July 2017.
 This new tax regime has replaced the incumbent structure of previous
indirect taxes, including central excise duty, service tax, and value-added
tax (VAT).

 WHY DO WE NEED GST ? (reasons)


 Unification of Taxes: GST replaced multiple central and state taxes
(like VAT, excise, and service tax) with a single, unified tax,
simplifying the tax structure.
 Ease of Doing Business: GST streamlined the tax process with a
single registration, making compliance easier and reducing the
administrative burden on businesses.
 Elimination of Tax Cascading: GST allows businesses to claim
input tax credit, reducing the cascading effect of taxes and lowering
the overall cost of goods and services.
 Boost to Economic Growth: By reducing tax barriers and
promoting efficiency, GST encourages greater trade, investment, and
economic integration across states.
 Increased Tax Revenue: The self-policing nature of GST, along
with digital tracking of transactions, leads to better compliance and
increased tax collections.
 Transparency and Accountability: GST’s clear and transparent
system has reduced tax evasion, ensuring greater accountability
from both businesses and the government.
 Support for SMEs: The simplified filing process and input tax credit
benefits small businesses, empowering them to compete more
effectively in the market.

FEATURES OF GST

1. Dual GST Structure


The report emphasized the dual GST model, which involves the
concurrent levying of GST by both the Central Government (CGST)
and State Governments (SGST) on the same tax base.

2. Comprehensive Coverage
The committee suggested that GST should be applicable to a wide range
of goods and services, except a few essential goods and services which
would be exempt. Eg :- Petroleum Products such as petroleum crude,
motor spirit (petrol), high speed diesel, natural gas and aviation turbine
fuel etc. are also kept outside the purview of GST .

3. Broad Tax Base with Minimal Exemptions


The report recommended a broad tax base, with minimal exemptions.
Only essential goods like food and healthcare might remain exempt or
have a lower tax rate.

4. Input Tax Credit (ITC) Mechanism


The Input Tax Credit mechanism was a key feature, allowing businesses
to offset taxes paid on inputs against taxes payable on their output.

5. Eliminates the cascading effect (tax on tax), and helps in reducing the
cost of production and overall tax burden.
6. Introduction of e-way bill and reverse charge mechanism
The e-way bill scheme under GST is an electronic document required for
the movement of goods worth over ₹50,000. It tracks goods
transportation, ensures tax compliance, and helps prevent tax evasion. It
must be generated before goods are moved.

 IMPACTS OF GST
GAINS
1. The most important gain is from the abolition of inter-
State check-posts erected to enforce taxes on cross
border transactions and intra-state check-posts
erected to collect octroi and entry tax by local bodies. This
has substantially removed impediments to the movement
of goods across the country and is an important step in
creating a national common market.

The GST unlike the sales tax which is levied on the sale of
goods and services is a tax on the supply of goods and
services and since there are no differences in the tax rates
between States, there are no tax gains to be had in
creating branch offices and this has made the supply chain
management more efficient.
2. Reduced cascading due to more comprehensive ITC
mechanism.
3. One of the major problems in Indian fiscal federalism is the
institutional vacuum to minimise transitional cost of inter-
governmental bargaining and conflict resolution and the
GST Council provide an interesting institutional
innovation for such a task. This is a model which can
be employed to foster much greater understanding
between the Union and the states.

4. Cost savings and Productivity gains:

The implementation of GST is a major reform and two years


is too short a term to assess its impact. Besides, it has
been undergoing continuous change both in structure and
operational details and in that sense it is an ongoing
reform.
ISSUES AND DISTORTIONS WITH GST

1. Complexity in Compliance

 Multiple Tax Slabs: One of the main issues with GST is the presence
of multiple tax slabs (e.g., 5%, 12%, 18%, 28%). This can create
confusion for both businesses and consumers, especially in
determining the correct rate for different goods and services.
 Complex Filing Process: The filing of returns, especially for small and
medium enterprises (SMEs), can be cumbersome. Businesses need to
keep track of input and output taxes, file multiple returns, and
reconcile the details accurately, which is time-consuming and
resource-intensive.

2. Technical Issues with GSTN (GST Network)

 GSTN Portal Downtime: The GST Network (GSTN), which supports


the entire GST infrastructure, has faced technical issues, downtime,
and slow response times, leading to delays in filing returns and
payments.
 Data Reconciliation Problems: There have been issues in reconciling
data between businesses' accounting systems and the GST system,
resulting in mismatches in tax returns and potential penalties.

3. Impact on Small Businesses


 Increased Compliance Burden: Small businesses face a higher burden
due to mandatory GST registration and filing requirements, even if their
turnover is below the threshold limit in some cases.
 Lack of Technical Expertise: Many small businesses lack the technical
know-how to comply with GST’s complex filing system and tax
calculations, leading to increased reliance on external consultants.

4. Inconsistent Implementation Across States


 State-Level Variations: While GST is meant to be a national tax, states
have some flexibility in the implementation of certain provisions, leading
to variations in interpretation and application across states. This can
result in different rules, penalties, and exemptions in different regions.
 Inter-State vs. Intra-State Transactions: The classification and tax
treatment of inter-state and intra-state transactions can lead to
confusion and disputes, especially when businesses are not fully aware
of the rules for tax credits across states.

5. Tax Evasion and Fraud


 Fake Invoices: GST has led to the rise of fake invoicing, where businesses
generate false invoices to claim input tax credit, leading to tax evasion
and fraud.
 Shell Companies: There have been instances where businesses set up
shell companies to evade taxes by claiming input tax credits without
actually carrying out any business activities.

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