MOVING TO GOODS AND SERVICES TAX IN INDIA: IMPACT ON INDIA’S GROWTH AND INTERNATIONAL TRADE

Submitted ByAnupam Yadav (101)Gajendra Mohan Jha (117)Ashok Chakravarthy K (122)Nikhil Dubey (130)Satyajit Bagchi (145)Venkani Alnoor (157)Chaitanya P (166)

INTRODUCTION GST - tax on goods and services with comprehensive and continuous

chain of set-off benefits from the producer's point and service provider's point up to the retailer's level.

Essentially a tax only on value addition at each stage Advantages

boost up economic unification of India better conformity and revenue resilience evade the cascading effect in Indirect tax regime reduce the tax burden for consumers simple, transparent and easy tax structure uniformity in tax rates increased tax collections due to wide coverage cost competitiveness of goods and services in Global market reduce transaction costs for taxpayers

Problems in implementing GST Computerization and trained personnel to audit revenues from

GST Carefully choose the most suitable tax rate Impact on general price level Adequately informing the general public Proper system to keep accounting records

The broad objective of this study refers to analyzing the impact of introducing comprehensive goods and services tax (GST) on economic growth and international trade.

HISTORY OF TAX REFORMS 1/4

References both in Manu Smriti and Arthasastra to a variety of tax measures

King taxed traders and artisans, agriculturists and others on a differential basis

Akbar of the Mughal dynasty constructed an efficient and fair Tax regime• decentralised system of annual assessment• It was replaced by a system called the Dahsala• This system was credited to Raja Todar Mal

Other local methods of assessment

British Tax System• Salt Tax, Irrigation Tax, Indigo Tax, Cotton Tax or the Railroad Tax

HISTORY OF TAX REFORMS 2/4• IT department was set up in 1922

• In 1924, Central Board of Revenue Act constituted the Board as a statutory body with functional responsibilities for the administration of the Income-tax Act

• In 1940 - Directorate of Inspection was created

• In 1941, the Appellate Tribunal came into existence

• Central Board of Revenue Act, 1963 was passed• Central Board of Direct Taxes was constituted, under this Act

• In 1965, the Voluntary Disclosure Scheme was brought in followed by the 1975 Disclosure Scheme

• Settlement Commission was created

• The recovery of arrears of tax which till 1970 was the function of State authorities was passed on to the departmental officers

• Tax Recovery Officers • Tax Recovery Commissioners

HISTORY OF TAX REFORMS 3/4• Post independence• strong Import Substitution policy• Economic Liberalization

• Tax reform in India resembles the best practice approach of • broadening the base, • reducing the rates, • reducing rate differentiation and • keeping the system simple

• Need for Change• In corporate tax, excise, customs and sales taxes - almost 40 per cent of revenue

comes from diesel and petrol. • Personal income tax continues to be narrow based

• Recent reforms - improve revenue productivity and horizontal equity

HISTORY OF TAX REFORMS 4/4

Indian government announces GST roll out in April 2011

to create an efficient and harmonized consumption tax system in the country

The first step towards introducing GST is to progressively converge the service tax rate and the CENVAT rate

The GST is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at a national level

End the long standing distortions of differential treatments of manufacturing and service sector

Impact: lead to the abolition of taxes such as • octroi, • Central sales tax, • State level sales tax, • entry tax, • stamp duty, • telecom licence fees, • turnover tax, • tax on consumption or sale

of electricity, • taxes on transportation of

goods and services

GST will facilitate seamless credit across the entire supply chain and across all states under a common tax base

CURRENT TAX STRUCTURE

Traditionally, India’s tax regime relied heavily on indirect taxes including customs and excise

Tax structure is a three-tier federal structure, comprising the Union Government, the State Governments and the Urban/Rural Local Bodies

The power to levy taxes and duties is distributed in accordance with the provisions of the government

The main taxes/duties that the Union Government is empowered to levy are Income Tax, Customs duties, Central Excise and Sales Tax and Service Tax

The principal taxes levied by the State Governments are Sales Tax, Stamp Duty, Land Revenue, State Excise

The Local Bodies are empowered to levy tax on properties, Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc.

INEFFICIENCIES IN THE CURRENT SYSTEM Taxation at Manufacturing Level:

The CENVAT is levied on goods manufactured or produced in India

gives rise to definitional issues as to what constitutes manufacturing, and valuation issues for determining the value on which the tax is to be levied

virtually all countries have abandoned this form of taxation and replaced it by multi-point taxation system

Exclusion of Service States are precluded from taxing services This limitation is unsatisfactory from two perspectives

the advancements in information technology and digitization have blurred the distinction between goods and services

negative impact on the buoyancy of State tax revenues

CONTD. Tax Cascading:

the most serious flaw of the current system occurs under both Centre and State taxes, most

significant contributing factor is the partial coverage Central and State taxes

increases the cost of production and puts Indian suppliers at a competitive disadvantage in the international markets

Complexity The most significant cause of complexity is policy related

and is due to the existence of exemptions and multiple rates, and the irrational structure of the levies

complexities under the State VAT relate primarily to classification of goods to different tax rate schedules

starting base for the CENVAT is narrow, and is being further eroded by a variety of area-specific, and conditional and unconditional exemptions

LITERATURE REVIEW Krueger, Anne O. (2008): “The Role of Trade and International Policy

in Indian Economic Performance”, Asian Economic Policy Review, (3), Japan Center for Economic Research. Should Indian economic policies continue in about their present form, it is likely

that growth might decelerate to a 5–6% rate. A political system and democracy with gradual reform and consensus, the “demo-

graphic dividend” as the percentage of population in the labor force will rise, etc., as demonstrated by achievements in IT so far.

Bird, Richard M., Jack M. Mintz and Thomas A. Wilson (2006): “Coordinating Federal andProvincial Sales Taxes” Lessons from Canadian Experience”, National Tax Journal, (59),809-25 Impact of VAT in Canada and its relevance to USA Operated both as a federal value-added tax (the GST) and two variants

of provincial VATs Canadian case suggests that the introduction of a federal VAT in the US

would not create any great technical problems for either the states or business.

CONTD.. Poirson Helene (2006): “The Tax System in India: Could reform spur

growth?”, IMF Working Paper. Assesses the effects of India’s tax system on growth, through

the level and productivity of private investment. Indian tax system is characterized by

a high dependence on indirect taxes low average effective tax rates and tax productivity high marginal effective tax rates and large tax-induced distortions on

investment and financing decisions GST would improve tax productivity and lower the marginal tax

burden and tax-induced distortions. Devarajan et al (1991): “A Value-Added Tax (VAT) in Thailand: Who

Wins and Who Loses?”, TDRI Quarterly Review, 6(1). the impact of introducing 10 per cent VAT in Thailand using a

general equilibrium model identify gainers and losers and the effect on output, prices and

incomes. does not bring out sectoral changes therein

CONTD.. Meagher, G.A. and Brian R. Parmenter (1993): “Some Short-Run

Implications of Fight back: A General Equilibrium Analysis”, General Paper No. G-101, CPSIP, Monash University. Analyse short-run implications of Australia’s tax reforms of 1992 proposed as

Fightback Use a general equilibrium model for their analysis The GST does not discriminate between imports and domestic commodities and affects

exports only in a minor indirect way impact on cost-sensitive industries exposed to international competition is smaller than

the impacts of other taxes Summers, H. Lawrence H(1989): "Tax Policy and International

Competitiveness," NBER Working Papers 2007, National Bureau of Economic Research Examines the interactions between tax policy, international capital mobility, and

international competitiveness effects of tax policies depend critically on the extent of the international capital flows

which they generate. while tax policies could generate large capital flows, governments pursue policies which

tend to inhibit capital flows following tax changes

CURRENT SYSTEM: PRINCIPAL DEFICIENCIES

Taxation at manufacturing level (CENVAT)

Exclusion of Services (for states)

Tax Cascading

Complexity

BALANCING GAME?

Vertical Equity

Horizontal Equity

TAX REFORM: OBJETIVO PRINCIPAL

Addressing Deficiencies

Economically

Efficient

Neutral in applicatio

nDistribution

ally attractive

Simple to administer

Tax DesignInfrastructure for tax

design

Degree of Harmonizat

ion

MODEL TO DETERMINE TOTAL OUTPUT OF VARIOUS SECTORS OF ECONOMY Structural input coefficients aij

Flows from sector “i” to sector “j”

of inputs required to produce one

rupee’s worth of output in the

current year

In standard input-output flow

matrix inputs required for capital

formation are included in the final

demand vector

B matrix (bij) represents capital

requirements of 60 sectors of the

economy

REGRESSION MODEL

RESULTS AND IMPLICATIONS

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