Features of Goods and Services Tax (GST)

Goods and Services Tax (GST) is consumption tax that charged the buyers to pay for a wide range of domestic & international products, goods and services. In some countries it is also called Value Added Tax. It is a multi-stage tax on domestic consumption levied on taxable supplies of goods and services. GST imposed on every level of a product from raw materials all the way to finished goods. Consumers still need to pay income tax as GST and income tax is totally different. It is a consumption tax charged on imports items and also value added to goods and services provided by a business to the end user. Goods And Services Tax will be borne by the end-user or consumer and is not intended to add burden to businesses.

Benefits of Goods and Services Tax (GST)

Eliminates cascading effects

GST also enable the minimization of distortions, therefore GST is preferable. The simple excises or the turnover taxes results in the unintended effect of taxing an output together with its input content more than once. Furthermore, it is also applying a tax on the earlier paid input tax leading to cascading. It causes producers to move their capital or resources away from the production of one output to another one which does not suffer from cascading. GST gives credit for input tax earlier paid, avoid the distortion as represented by misallocation or redirection of resources from one economic activity to another.

In addition, GST is the only tax that offers positive alternatives to the negative impact of indirect taxation. It is an accepted fact that commodity taxes create severe cascading effect as the taxes levied at earlier stages of production and distribution get taxed again and again at subsequent points. Consequently, instead of paying taxes on the value addition by a manufacturer, wholesaler or retailer, tax is paid on an inflated value, which includes taxes already paid at earlier stages. Such anomalies escalate prices and encourage vertical integration, where the manufacturer himself tries to wholesale and retail the goods. Vertical integration has been responsible for recession and unemployment particularly in developing countries. GST has an inbuilt device for reducing the cascading effect by restricting the levy to actual value addition. It encourages growth by confining tax burden to the net economic contribution of the taxpayer. Moreover, since the Capital Investment also gets tax relief. GST can accelerate economic growth by encouraging modernization and replacement. Therefore, it does not alter producers’ decisions to produce particular commodities which, in general, should reflect the demands from consumers. However, for this benefit to occur, the GST must give credit for raw materials and capital goods.

Improves International competitiveness

Furthermore, since GST has the potential for eliminating cascading, it is possible to design the GST in a manner that will ensure that exports are free from any tax burden (zero-rating). Further, such adjustments under the GST structure are also WTO consistent. As a result the competitiveness of exports in international markets is enhanced. Even though exports are generally exempt from sales tax and the burden of input tax embedded in the exports is sought to be eliminated through the duty drawback mechanism, nevertheless, the process is cumbersome and the effect is not fully realized. As export competitiveness can be adversely influenced by then tax factor, the capacity to zero rates easily and accurately is an important aspect of the GST.

Eases administration

Although there are feasible options limiting the impact of cascading, the utility of multipoint GST goes much beyond that. Arresting cascading could be considered important to a regime of GST. Nevertheless, the institution of GST in fact should be conceived also as an instrument of tax administration, an administration that checks evasion through a self-monitoring feature, and an account based audit system that is regarded as superior to the system of physical verification. The latter already having fallen into disrepute for causing distress to tax filer needs to be eventually abandoned as its positive impact on revenue yield remains questionable. An account-based audit should not only tighten the tax net but raise revenues through a wider acceptability of a tax administration in the public eye. Much more administrative and documentation requirements arise from the introduction of GST. Compliance costs are bound to increase. Often, adverse situations arise when documentation is inadequate.

Source of Revenue

GST system is widely considered as a more comprehensive, effective, efficient and transparent tax system. The Governments have been turning to GST as a way to broaden the tax base and increase revenue especially when they are facing chronic budget deficits or growing expenditures. Thus, GST can be seen as a more stable flow of revenue for the Government compared to income tax because it allows a relatively larger coverage and it can extend its value addition at all stages in the production-distribution chain. In addition, GST can be a good source of revenue since it is income elastic and not sensitive to changes in prices of particular goods. Hence, many countries including Singapore, Thailand and Indonesia have adopted GST as a part of their fiscal strategy in order to successfully strengthen their finance position.

Besides that, GST is the more effective way for the government to raise more revenue and also to diversify the source of income. The Government has a narrow revenue base which is currently 40% depends on the contribution from petroleum sector. This is a risky situation for the Government because the contribution from petroleum sector is not a reliable source of revenue. This is because the price of petroleum is volatile and the commodities are depleting natural resources. Thus, the weaknesses in the Government’s financial position can be solved through the implementation of GST. The Government can also reduce the dependency on income tax revenue. Thus, it will assist the Government to improve the revenue mix and more tax revenue can be used for financing development or social projects.

Furthermore, GST can be used as a tool to manage the economy. For example, Britain reduced its VAT standard rate from 17.5% to 15% in December 2008 to boost the consumer demand during the financial crisis. Introduction of GST will also give the Government a golden opportunity to lower personal and corporate income tax rates. A lower corporate and individual tax rates can encourage more foreign direct investment which can generate a stable and predictable tax income in both good and weak economic environment. Thus, a steady revenue base can be maintained which ultimately leads to overall economic growth.

Imparts Transparency

One of the positive aspects of the GST system is its simplicity and transparency. It has a built-in control mechanism to track down defaulters. This will help to minimize the tax evasion by traders. Besides that, the hidden sectors and industries are encouraged to be in the GST system. A business can claim an input tax credit on purchases of intermediate goods or services as long as the suppliers have issued tax invoices to the business. Furthermore, the businesses are only required to submit simplified tax returns based on prescribed formats. In addition, GST is expected to increase tax compliance and is easier to administer in view of its self-policing method. The implementation of GST will help to improve the maintenance of proper accounts and financial records. Therefore, this can lead to enhancement in the capability, effectiveness and transparency of tax administration and management.

GST is generally collected based on value added at each stage of supply chain, with the tax burden ultimately borne by the end consumer. This tax will be applicable whenever value is added to goods or a service. Therefore, both producers and consumers are fully aware of the tax liability. There is a difference with the existing sales tax and service tax where taxes are embedded in the price of goods and services. The consumers may not realize that they are actually bearing the taxes. Furthermore, consumers can expect to see a drop in the prices of certain goods and services. This is because some essential goods will be zero-rated while certain items will be exempted from GST. This will also enable the government to subsidize essential controlled items for the needy and thus improve the healthcare of the taxpayers.

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