GST Blues ... World Bank update

World Bank’s update on India GST are worth pondering.

• The unified Goods and Services Tax (GST), which subsumed a web of central and state levies to make life easier for businesses, is one of the most complex and has the second highest rate in the world.
• As many as 49 countries around the world have a single slab of GST, while 28 countries use two slabs, and only 5 countries, Italy, Luxemborg, Pakistan and Ghana and India, use four non-zero slabs. 
• Indian GST’s top slab of 28% is the second highest of the 115 countries in the world.
• Separately, gold is taxed at 3% rate, precious stones at 0.25%, while alcohol, petroleum products, stamp duties on real estate and electricity duties are excluded from the GST and continue to be taxed by the central and state governments.
• India’s landmark tax reform was off to a chaotic start in July 2017.
• The tax overhaul brought along some teething issues and disruptions. Dealers stocked up on inventory and reduced production, pulling down growth to a three-year low. 
• Disruptions are due to lack of clarity on discontinuation of local taxes; demands for exemptions or lower tax rate; and on account of coping mechanisms to preserve revenue collections.
• Revenue collections have taken a hit. India missed its fiscal deficit target this year.
• India’s threshold for GST registration is also the highest. Businesses with an annual turnover of Rs 1.5 crore fall under the GST regime and are eligible to get input tax credit. 
• Those with annual sales below that and over Rs 20 lakh are allowed to pay a flat tax rate of 1% but can’t charge GST on sales or recieve tax credits. That’s mainly to ease the cost of compliance for small businesses.
• GST resulted in increased administrative tax compliance burden on firms and locking up of working capital due to slow tax refunds.
• High compliance costs are also arising due to prevalence of multiple tax rates implies a need to classify inputs and outputs based on the applicable tax rate.
• While teething problems on the administrative and design sides persist, the introduction of GST should be considered as the start of a process, not the end. The economy is adapting to the new system. 
• International experience suggests that the adjustment process can affect economic activity for several months, the benefits of the GST are likely to outweigh its costs in the long run.
• The key to GST’s success would be a policy design that minimises compliance burden by reducing the number of different rates, limiting exemptions and simplifying laws and procedures. A communication campaign is crucial to convey the various aspects of the new tax regime to businesses.

Read the source article

Implementing the GST will only boost the competitiveness of manufacturing, trading and services sector engaged in selling goods & services throughout the country by economizing logistic delays, warehousing facilities and streamlining tax payment systems. The report is silent on size of country and its business net work, complexity of demography and support of political opponents to government body. The informal sector with single or family run shops & services with razor thin margins, high working capital costs they find GST compliance costs unaffordable. Today, the reality is small traders collect GST from consumers they neither pay the same to Govt nor file returns. They are spread across the country and impossible for forcing them to comply with corrupt taxmen. Those who were VAT payers in the past have cancelled their GST registrations. Every importer understates invoice prices and quantities especially from China. There is nothing which can't be bought for cash without receipt. This a big hole in GST collections and centre simply stares at this leakage and loss.