Tax Buoyancy in Pre and Post GST Era, Challenges Of GST

 

Tax Collection Pre and Post GST Era:

• The aggregate state and central taxes exhibited a CAGR of 11.53 per cent in the pre-GST period (FY13 to FY17) while the nominal GDP grew at a CAGR of 11.54 per cent during this period. 
• CAGR of the aggregate state and central taxes was marginally less than the growth of GDP, the  Tax Buoyancy was just below one .
• The Post-GST period experienced  the shock of the Covid pandemic. During this period,the nominal GDP grew at a slower CAGR of 9.6 % (FY19 to FY23) while GST collections grew at a CAGR of 10.9 per cent, implying Tax Buoyancy of around 1.1.
• Improved tax collection efficiency has resulted in increased Tax Buoyancy and it is  the main arguments in favor of GST. 

Speaking at the GST Day 2023, The Finance Minister stated that Tax Buoyancy of states has improved to 1.22 post-GST rollout from 0.72 in the pre-GST period. 

FY 2018-19---11.77 Lac Crores

FY 2019-20---12.22 Lac Crores 

FY 2020-21---11.36 Lac Crores 

FY 2021-22---14.76 Lac Crores 

FY 2022-23---18 Lac Crores

FY 2023-24 ---20.18 Lac Crores

In the first year of GST implementation Collection was less than 1 lac crore per month while it has reached to approx. 1.7 Lac Crore in FY 24. 

Challenges Of GST:

• Manufacturing states lose revenue on a bigger scale as GST is destination-based taxation .
• Input Tax Credit has certain limitations as conditions for availing ITC are stringent, leading many taxpayers to lose out on ITC. 
• Taxpayers also lose their Input Tax Credit (ITC) due to non-reporting or mistakes by their suppliers.
• Wrongful or fake Input Tax Credit (ITC) claims has emerged as a major cause of concern for GST authorities.
• GST regime has the complex four tier Tax structure as ranging from 0%,5%,12%,18% and 28% along with lesser used GST Rates (.25 % and 3 %) apart from GST Compensation Cess .
• The GST regime has increased the compliance burden for taxpayers, especially for small and medium-sized enterprises (SMEs). 
• GST requires taxpayers to file returns every month, which is time-consuming and complicated for SMEs.
• Despite Technological advances and compliances, still there is Tax Evasion.
• Goods and Services Tax (GST) authorities are learnt to have detected evasion of around Rs 2.01 lakh crore in 2023-24 — an amount equal to almost 10% of the total GST collected during the financial year. It is found that the majority of the alleged tax evasion was in sectors such as online gaming and casinos (Rs 83,588 crore), co-insurance/re-insurance (Rs 16,305 crore) and secondment (Rs 1,064 crore).

Duty Draw Back vs Remission of Duties and Taxes on Exported Products (RoDTEP)

 

Definition of Imports Under GST:

• As per IGST (Integrated Goods and Services) Act, 2017, Import is defined as bringing commodities /services from overseas into India. 
• Under GST regime, all imports are considered as inter-state supplies.
• As imports are considered at par with inter-state supplies, IGST is applicable to all imported goods and services  along with custom duties as applicable.

Duty Draw Back vs Remission of Duties and Taxes on Exported Products (RoDTEP):

• In order to have competitive trade, Exports needs to be zero-rated exports.
• To ensure competitive trade, GOI has multiple schemes
• In Pre-GST era, Duty drawback scheme was in place to ensure refund of taxation by Governments.
• Post-GST, Remission of Duties and Taxes on Exported Products (RoDTEP) is the prominent scheme.

Duty Draw Back:

• The duty drawback scheme allows exporters to get a refund when the customs duties are paid on imported items .
• These imported items are used in manufacturing of the items that are to be exported as illustrated:

Remission of Duties and Taxes on Exported Products (RoDTEP):

• In GST regime, the export industry in India remains internationally competitive prices due to the claiming of Input Tax Credit (ITC).
• But there are certain taxes which are out of GST regime e.g. Taxes on fuel used in transportation, Mandi tax, taxes on electricity, petroleum products etc 
• These taxes which are not covered under GST are not refundable under Input Tax Credit (ITC) in case of exports even in the GST regime.
• The objective of Remission of Duties and Taxes on Exported Products (RoDTEP) is to neutralise the impact of these non -GST taxes upon exported goods by providing rebates on all these non-GST taxes which are not refunded through Input Tax Credit (ITC). 
• Remission of Duties and Taxes on Exported Products (RoDTEP) ensures that Exports remain zero-rated exports by reimbursing the non-GST taxes upon submitting a proof that the items have been exported.
• All exporters of goods - merchant exporters and manufacturer exporters and SEZ  are eligible to claim the benefits of the RoDTEP scheme as long as the country of origin is India. 

Goods and Services Tax Identification Number (GSTIN),REVENUE NEUTRAL RATE (RNR),GST Compensation Cess, Anti-Profiteering Rules

 

                    

Goods and Services Tax Identification Number (GSTIN):

• Goods and Services Tax Identification Number (GSTIN) is a 15 alphanumeric character, PAN based distinctive number, assigned to every GST registered entity.
• Goods and Services Tax Identification Number (GSTIN) provides unique identity to the business entity in the GST regime. 

REVENUE NEUTRAL RATE (RNR):  

• GST rate at which the amount of taxes collected by the government in pre-GST regime and the amount expected to be collected post- GST remains the same.
• In Pre-GST era, state governments were having various taxation powers while post GST states lose taxation powers.
• So, REVENUE NEUTRAL RATE (RNR) ensures that the states don’t loose their revenue in the wake of GST regime.

GST Compensation Cess :

• GST Compensation Cess is levied on inter- and intra-State supply of notified goods such as aerated drinks, coal, tobacco, automobiles.
• The objective of GST Compensation Cess  proceeds is to distribute the Cess proceed to loss-incurring States on the basis of a prescribed formula so as to compensate the loss making states. 
• GST Compensation Cess was introduced through the GST (Compensation to States) Act, 2017 for initial 5 years
  
  . 
• The tenure of GST Compensation Cess has been extended to 31 March ,2026.

Composition Levy:

• The composition levy is taxation imposed upon small , small, micro and informal units taxpayers whose turnover is up to Rs. 1.5 Cr ( Rs. 75 lakhs in case of few States).
• The objective of Composition Levy is to bring simplicity and to reduce the compliance cost for the small taxpayers.   
• Composition Levy is to be levied upon the turn over and it is optional. 
• Eligible person opting to pay tax under Composition scheme can pay tax at a prescribed percentage of his turnover every quarter, instead of paying tax at normal rate. 
• Entities opting for composition levy can do their business activities within the state as restricted to do Inter- state business.

Anti-Profiteering Rules : 

• As per Anti-profiteering rules, the suppliers of goods and services have necessarily pass on the benefit of any reduction in the rate of tax or the benefit of input tax credit to the recipients by way of commensurate reduction in prices.
• The willful action of not passing the benefits on account of change in the rates and Input Tax Credit (Understanding Economy from basics to an expert perspective from a Guide ,Teacher and Practitioner: INPUT TAX, Input Tax Credit) to the recipients is known as “Profiteering”.
• National Anti-profiteering Authority (NAA) was set up  as statutory body under Section 171 of the Central Goods and Services Tax Act ,2017 to deal with  Anti-profiteering rules
• The objective  of  NAA was to ensure the implementation of Anti-Profiteering Rules 
• After the end of the tenure of this body on dec 2022,all powers are vested in Competition Commission of India .

Forward Charge Mechanism vs Reverse Charge Mechanism, Inverted duty structure (IDS)

 

                    

Forward Charge Mechanism :

• In Forward Charge Mechanism, the  supplier of the goods is liable  for collecting taxes and remitting it to the government
• Receiver of the goods is not involved in the direct tax payment though the ultimate  Tax implication is upon the recipient .
• Forward Charge Mechanism is being followed in GST regime.

Reverse Charge Mechanism:

• In the normal economic transactions, Forward charge mechanism is to be followed in which the supplier of goods or services is liable to pay GST.
• In Reverse charge Mechanism , the liability to pay tax rests on the recipient of  goods or services rather than that of the supplier.

 Reverse charge Mechanism is applicable:

1.if the supplier is not registered with GST like goods purchased from any foreigner and the foreigner who is a s supplier is not registered with GST.

2.In certain goods as specified in the list by Central Board of Indirect Taxes and Customs (CBIC) in line with powers conferred in section 9(3) of CGST Acts.

• In case of Reverse Charge Mechanism, the seller can not claim Input Tax Credit.
• The buyer has to claim the Input Tax Credit (Understanding Economy from basics to an expert perspective from a Guide ,Teacher and Practitioner: INPUT TAX, Input Tax Credit) in Reverse Charge Mechanism.
• The buyer can avail of Input Tax Credit under RCM if and only if such goods or services are used for business purposes.
• As buyer has to claim Input Tax Credit, Self Invoicing is to be done by the buyer to claim Input Tax Credit.

Inverted duty structure under GST (IDS):

Inverted duty structure (IDS) refers to Tax structure where the tax rate on purchased  goods is more than the tax rate on finished goods . For Example :

                   Distributor of LPG cylinder pays 18 % on  purchase of  LPG 

                                                           While 

                   Domestic consumer has to pay 5 % on purchase of  LPG cylinder .

So, Tax rate on raw material ie LPG is more than the sale of the Good ie LPG sale to the consumer ,a case of Inverted duty structure (IDS).

The Inverted duty structure (IDS) creates  administrative problems in the sense that:

(1) There is accumulation of credits in the form of refund claims in the name of tax payer (distributor in the example).

(2) Inverted duty structure (IDS) is a revenue loss for the government as it has to refund the tax already paid (in inputs).

(3) Under GST, the inverted duty structure is identified for goods and not for services.

INPUT TAX, Input Tax Credit

 

INPUT TAX:

Under GST regime, Input tax is tax charged on supply of goods and/or services to the manufacturer which are used in the course of his business .

Input Tax Credit (ITC):

• Input Tax Credit is the reducing of Tax liability by claiming the tax (Input Tax) which has been paid by the businessman at the purchase of the items used for manufacturing.
• This adjustment takes place in the GST wallet of businessman automatically when these transactions take place.

In the example, Let the manufacturer uses inputs A,B and C to produce an output:

Taxes paid by manufacturer are:

        Tax paid on A:100

        Tax paid on B:120

        Tax paid on C:80

This Total tax ie Rs 300 paid by the manufacturer is INPUT TAX.

Now, if manufacturer produces item such that total tax implication on output: Rs 450

Tax to be paid by Manufacturer: Rs 450

Tax already paid ie Tax Input by manufacturer on the inputs: Rs 300

Tax to be paid by manufacturer after Input tax credit = Rs 450-Rs 300 

                                                                                                 =Rs 150

This process of refund of  Tax Rs 300 by the Income Tax Department is said to be Input Tax credit .

• Input Tax credit (ITC) lowers the total tax liability as Input Tax is returned back.
• Input Tax credit (ITC) increases the cash flow with business man as it refunds the tax amount to the businessman.

VALUE ADDED TAX vs GOODS AND SERVICES TAX, PRINCIPLES OF GST, Main Features of GST,

 

VALUE ADDED TAX (VAT) vs GOODS AND SERVICES TAX (GST):

• Value Added Tax, is precursor to the GST regime. 
• Value Added Tax is applicable at the sale of goods while GST is applicable for both goods and services.
• Value Added Tax and Goods and Services Tax (GST), both are charged on the increase in value of an article at each stage of its production or distribution. 

GOODS AND SERVICES TAX (GST): 

• Goods and Services Tax (GST) is single indirect tax for the whole nation, making India one unified common market. 
• Goods and Services Tax (GST) was implemented on 1st July 2017 
• Goods and Services Tax (GST) replaced the multiple indirect taxes and surcharges eliminating the cascading effects of taxation.

Central Indirect Taxes which are included in GST regime:

•  Central Excise duty, 
• Central Sales Tax
• Additional duties of excise,
•  Excise duty levied under Medicinal & Toilet Preparation Act,
• Additional duties of customs (CVD & SAD) ,
• Service Tax and Surcharges & Cess

State Indirect Taxes which are included in GST are :

• State VAT / Sales Tax
• Purchase Tax 
• Entertainment Tax (other than those levied by local bodies) 
• Luxury Tax 
• Entry Tax (All forms)
• Taxes on lottery,
•  betting & gambling  and  
• Surcharges & Cess.

PRINCIPLES OF GST:

• The Centre will levy and collect the Central GST. 
• The States will levy and collect the State GST on the supply of goods and services within a state.
• The Centre will levy the Integrated GST (IGST) on the interstate supply of goods and services.
• A part of Integrated GST (IGST) is given to the state where the good or service is consumed. 

Main Features of GST :

Applicable On supply side:

GST is applicable on ‘supply’ or consumption side of goods or services unlike the previous concept of Excise Tax on the manufacture of goods or on sale of goods .

Destination based Taxation: 

GST is based on the principle of destination-based taxation as against the present principle of origin-based taxation.

Dual GST: 

• GST  can be imposed by the Centre and the States simultaneously .
• GST levied by the Centre is called Central GST (CGST) and GST levied by the States is called State GST (SGST).
• Integrated GST (IGST) is to be levied upon Interstate sale.
• Import of goods or services is treated as inter-state supplies and hence subjected to Integrated Goods & Services Tax (IGST) in addition to the applicable customs duties.

GST rates to be mutually decided: 

CGST, SGST & IGST are levied at rates to be mutually agreed upon in GST Council.

Multiple Rates:

• GST slabs for any regular taxpayers are pegged at 0% (nil-rated), 5%, 12%, 18% & 28%. 
• Lesser-used GST rates are at 3% and 0.25%. 

There are certain taxes which are still not under GST:

• Alcohol and Tax on Petroleum Product
• Entry Taxes, Mandi Charges, and Toll 
• Entertainment Tax (Levied by Local Bodies) 
• Road Tax or Vehicle Tax, 
• Tax on Sale and Consumption of Electricity
• Stamp Duty and Custom Duty

Tax Mitigation,Tax Expenditure/Expenditure forgone, Fiscal Drag

 

                               

Tax Mitigation: 

• Tax mitigation is a legitimate method by which an individual reduces its Tax burden.
• Taxpayer takes advantage of a fiscal incentive afforded to him by the tax legislation. 
• Tax mitigation is an acceptable practice and is facilitated by Government.
• An example of tax mitigation is the setting up of a business undertaking in Special Economic Zone (SEZ) to avail various tax incentives.  

Tax Mitigation vs Tax Avoidance:

• Tax avoidance involve specific loopholes in the law, such as tax havens while Tax Mitigation involves all the legitimate methods.
• Tax Avoidance is negative in the sense that it is associated to exploit the tax system for personal gain while Tax mitigation is allowed by the Government itself for a specific reason.

Tax Expenditure/Expenditure forgone: 

• Tax expenditure are concessions and exemptions provided to the tax payers by the government so as to promote certain type of activities like R&D, businesses, public welfare etc. 
• These tax exemptions can also be to the corporate to help out them or to promote particular areas and industries. 
• Tax Expenditure shows the extent of indirect subsidy enjoyed by the tax payers in the country.

Fiscal Drag: 

• When income of an individual increases, then the individual enters into higher tax bracket resulting into more tax payments to the government. 
• This situation results in less money with individual to spend and hence less liquidity in the economy leading to slow down.

During the economic boom

:

                                              Incomes of an individual increases  

Tax Payment of individual increases

                             More money going in the form of taxes to the government

                                                                            

                                                        Less Money left with Taxpayer 

                                                                            

                            Less money left with the Tax Payer to spend in the economy 

                                                                            

                                                         Slow down in the economy.

Tax Elasticity , Laffer Curve, Tax Buoyancy,

 

TAX ELASTICITY: 

• Tax Elasticity refers to changes in tax revenues in response to changes in tax rate. 
• For example, Changes in Tax revenue when the government reduces corporate income tax from 30 per cent to 25 per cent indicate tax elasticity. 

Tax Elasticity in India:

• Post LPG reforms, the Income Tax rates have reduced while the tax collections have increased. 
• Tax elasticity can be understood through Laffer curve.

Laffer Curve: 

• The Laffer curve, explains the theoretical dynamics of Tax Elasticity ie relationship between rates of taxation and the resulting levels of the government's tax revenue. 
• As per the Laffer curve if the tax rate increases, the government revenue also increases up to an optimum level. 
• Post which, if the government tries to increase taxes, the government revenue will start falling.

So Conclusively, Revenue shortfall can be because of:

                           Increased rates of Tax Rates.

                                     providing 

                    More incentive to evade taxes (illegal).

 TAX BUOYANCY:

• Tax Buoyancy explains relationship between the changes in government’s Tax revenue growth wrt the changes in GDP.
• Tax buoyancy is one of the key indicator to assess the efficiency of a Government’s tax system.
• Tax buoyancy measures the responsiveness of tax mobilization to economic growth.

Tax buoyancy depends largely on –

• Size of the Tax Base
• Friendliness of the Tax Administration
• Simplicity of the tax Rules 

Tax buoyancy in India :

• Tax Buoyancy greater than 1 signifies that tax revenues grow at a faster rate than the growth in national income.
• Direct Tax Buoyancy at 2.52 in F.Y. 2021-22 is the highest Direct Tax Buoyancy recorded over last 15 years and it was on account of low base effect .
• In 2022-23 ,Central Direct Tax Buoyancy = %change in direct taxes / % change in nominal GDP = 17.8% / 15.1% = 1.18

Tobin Tax,Pigouvian Tax,Pink Tax,Border Adjustment Tax

 

Tobin Tax: 

• Proposed by James Tobin, Tobin Tax was proposed to be imposed on all foreign exchange transactions. 
• Tobin Tax is imposed when foreign capital enters a country and leaves the country.
• The aim of Tobin Tax is to check speculative flows of foreign capital. 
• Many times economists have demanded for imposition of Tobin tax like for climate change .
• Securities transaction tax in India is also an example of Tobin tax as it is also used to check speculation in financial markets.

Pigouvian Tax: 

• Pigou in 1920 drew attention to the negative externalities of the economic activities .eg steel production results in emitting foul smoke leading to social cost to the society.
• Private producers would produce steel up to the point where the private marginal cost is equated to the private marginal benefit. 
• Pigou suggested to take its social cost into account  in the form of Pigouvian Tax .
• It is imposed on bodies that have a negative externality affecting the other persons 
• Example of Pigouvian tax are Coal Cess, Extra taxes on Cigarette etc

Pink Tax:

• Pink Tax is a discriminatory practice that acts as a surcharge upon products meant for female similar to their male counterpart eg Microsoft pink mobile mouse is priced 39 % higher than the identical model in blue.
• Women has to bear extra cost in transportation.
• Health premium for women is high given the health complications.
• Women have to divert portion of their income for day to day necessities .
• Lack of access to education make them more vulnerable to the advertisements marketing strategies etc.

Border Adjustment Tax (BAT) :

• Border Adjustment Tax (BAT) is an additional duty that is imposed on imported goods in addition to the customs duty.
• Border Adjustment Tax (BAT) seeks to promote “equal conditions of competition” for foreign and domestic companies supplying products or services within a taxing jurisdiction. 
• Border Adjustment Tax (BAT) is imposed in order to attain a certain objective  like EU imposed BAT to achieve Green commitments and this taxation is being criticized by India .