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Understanding about GST Tax Rate and the Tax base

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Understanding about GST Tax Rate and the Tax base

A comparison of GST with those of the GST system prevailing internationally reveals that, the tax rates in the Indian GST system are among the highest in the world. The highest GST rate in India, while only applying to a subset of goods and services traded, is 28 percent, which is the second highest among a sample of 115 countries which have a GST (VAT) system. The illustrative list of countries falling into the sample are Hungary with GST Tax rate as high as 27%, Dominican Republic with tax rate of 18%, Madagascar/Morocco with tax rate of 20%, Uruguay with tax rate of 22%,New Zealand/Fiji/Samoa/Tonga with tax rate of 15%, Philippines with tax rate of 12%and Malaysia with tax rate as low as 6%. Philippines and Malaysia which is remarked as Asian Countries have lowest GST(VAT) rates compared to India which has GST Tax rate as high as 28%. This picture tells us that India has the highest standard GST rate in Asia as well and also highest when compared to other countries.

Let us first unlearn everything we know about GST and learn it afresh but with a different angle. As we all know that the Goods and Services Tax (GST) was introduced in India on 1st July, 2017, after more than a decade of efforts. It replaced an existing system of fragmented and complex indirect taxes, consisting of multiple central and state taxes. Under the earlier tax system, states unilaterally levied ‘entry taxes’ on all goods that entered its territory, resulting in inefficiencies and huge costs to the economy. The new GST was designed to bring about a common policy and administrative framework for taxation of the supply of goods and services across the entire country while causing minimum tax based restrictions on trade, besides harmonizing the rates on goods and services.

Speaking of GST one must first know about the GST base structure around which the numerous taxes have been merged or stoned to give a complete picture of one nation one tax. The Indian GST applies to supply of most goods and services occurring throughout the territory of India with taxing powers assigned as follows:

  • All sales within a state are taxed both by the center as well as the states over a common base and at the same rate, which together add up to the full GST rate. The taxes levied are called the State GST (SGST) and the Central GST (CGST), respectively.
  • All sales from one state to another are taxed by the center at the full GST rate applicable. The relevant tax levied is called the Inter-State GST (IGST).
  • For sales across state lines, any input taxes on purchases can be deducted (i.e. an input tax credit is available) from taxes collected on sales regardless of the source of the purchases.

So what about the GST rate then. Is the GST rate equal to GST tax rate. Is the equation on the right corner. Let us first get into the GST Rates which have been divided into Slabs ranging from 0% to 28% to understand the equation we have laid out for you. The GST has different tax rates – 0, 5, 12, 18, and 28 percent. Further, there are several exempted sales and exports are zero rated, which allows exporters to claim refund for taxes paid on inputs. The GST excludes small firms with turnover below Rs. 20 lacs, and only taxpayers with turnover of Rs. 1. 5 Crores or more charge GST on sales at the prescribed rates and can deduct GST paid on their purchases. Taxpayers who have turnover from 20 lakhs to Rs. 1.5 Crores have the option of participating in a ‘composition scheme’ whereby they pay a tax on turnover instead on value added.

When we talk about GST rates we are sure that there’s has to be some person on the other end administering these taxes. The command of GST India has been harmonized between the center and the states using a common IT system and common rules with the powers to audit being shared. To support the administration of the taxpayers, a common nationwide IT backbone called the GST Network (GSTN) has been put in place, through which all tax returns are required to be filed. This portal captures all tax returns and allows for verifying input tax credits claimed by businesses. The system can also aid in the selection of taxpayers for audit through a risk based selection mechanism. On the policy side, coordination between the Center and the States and, between States is made possible through a GST council comprising of the finance ministers of all the State governments and the Central government. The innovative and integrative body behind the framework of GST that formulates a common policy and administrative framework for the GST that applies to the entire country is called by the name GST Council, which by now we all are aware off.

Let us now learn about the objectives of GST tax system India which will reveal the facts about GST Tax Rates and the tax base. The GST tax rate is the central parameter that determines the collection of tax revenue, with higher tax rates typically leading to higher tax collection rates, holding constant the tax base.110 However, increasing tax rates also increases the tax burden on firms and consumers, can discourage production and consumption and incentivize tax evasion. The coverage of the GST is determined by two parameters :

Parameter 1: First, the number of different tax rates (including the introduction of tax exemptions) determines the extent to which different products are covered. This design parameter is typically used to protect the consumption baskets of the poor and achieve other social objectives. The number of different tax rates also determines the complexity of the GST, with multiple rates imposing additional costs on compliance for businesses as well as the tax administration and encouraging evasion.

Parameter 2: Second, the registration threshold determines which taxpayers are covered by the system. This is thus an instrument that governments can use to relieve smaller firms from the burden of complying with a GST. As is the case in India, it is also possible to introduce a simplified system in lieu of exemptions for smaller firms which is administratively easier. The disadvantage of introducing registration thresholds and having a simplified and presumptive tax regime is that it inevitably fragments the tax system, which may reduce the tax base and provide an incentive for larger firms to mask their size and benefit from the reduced compliance burden. In addition, tax schemes that levy taxes on sales rather than value added provide incentives for sellers to reduce their taxable sales, and potentially promoting economic inefficiencies by dis-incentivizing business growth, integration and expansion.

Speaking more of the GST Rates we come to know that Indian GST system currently has 4 non-zero GST rates (5, 12, 18, and 28 percent) while most countries around the World have only a single rate of GST. The countries that use four or more rates of GST include Italy, Luxembourg, Pakistan and Ghana. Therefore India when combined with these four countries has among the highest number of different GST rates in the world.

So what could be made of this discussion so far about the GST rates and the tax base on which this GST is going to operate. Well we can say that GST India is still a premature baby which has to consider various policy considerations and changes down the line when it finds its feet or get into the niche. Policy considerations such as demands for exemptions or lower tax rate (e.g. by the textile sector in Gujarat) and the crunch felt on revenue collection taken state wise requiring the need to compensate for the losses suffered on tax collection frontier as well as lowering down the difficulties on grounds of tax compliances, easing out the tax burden on locking up of working capital mainly for exporters due to slow tax refund mechanism. But at the same time it’s also true that the GST Council have never turned its back on these issues and has continued to address these challenges when and ever faced. In August 2017, the council lowered the tax rate for job work along the textile sector value chain to 5 percent from 18 percent. In September 2017, the GST rate on about 30 commonly used products was lowered, and this process was extended to another 27 goods in October 2017. On the administrative side, the GST council recommended faster processing and payments of refund claims. To ease the compliance burden for small and medium businesses the council changed the filing frequency from monthly to quarterly for firms with annual aggregate turnover up to INR 15 million. The council also increased the turnover limit for the “composition scheme” from Rs. 75 lakhs to Rs. 1.5 Crores.

Apart from this, the Council has also toiled and worked on the technological improvements to facilitate GST administration. As such, the GST council announced the introduction of an “e-wallet” scheme by April 1st, 2018. Under this scheme, advance refund payments will be credited to a virtual account, which can be used to make GST related payments. In addition, early 2018 is expected to see the wider introduction of the e way bill system, which facilitates a technology-driven tracking of movement of goods worth more than Rs. 50,000 and for sale beyond 10 km in distance. To sum it up one can say that despite of the initial hiccups, the introduction of the GST is having a far-reaching impact on reducing tax related barriers to trade barriers which was one of the primary goals of the introduction.

About Author:

Shruti Gupta is a writer, digital marketer and outreaching expert .She writes about technology, startups & other niches. She has contributed to a number of famous websites like Thenextweb, Deccanchronicle and Crazyegg. Stay tuned with her at:@shruti_gupta01 or via Skype : shrutigupta2811

 
 
 
 
 

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