GST and The Global Tax Landscape

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Published Date:  26-11-2023   Author:   moulik-jain
gst and the global tax landscape

The Goods and Services Tax (GST) introduction in India in 2017 represented a major reform of the country’s complex indirect tax system. By replacing multiple central and state taxes with a unified tax, GST aimed to create a common national market. As one of the world’s fastest-growing economies, India’s adoption of GST is expected to have significant domestic and global impacts. Domestically, by removing tax barriers between states, GST should spur growth. 

For international trade, GST could boost India’s exports by making exports more competitive. The simplification of taxes should also attract more foreign investment into India. As more countries implement GST regimes, India’s adoption also signals its integration into the evolving global GST landscape. While initial implementation issues remain, GST represents a milestone for India’s ambitious growth agenda.

Simplifying India’s Tax Structure

India’s indirect tax system before GST was complex, with multiple Central and State taxes applied at various points in the supply chain. Taxes included Central Excise duty, Additional Excise duties, Service Tax levied by the Central government, as well as State level taxes like Value Added Tax (VAT), Central Sales Tax (CST), Entry Tax, Luxury Tax, and Entertainment Tax. This multitude of taxes, often cascading and leading to double taxation, made compliance highly cumbersome and inefficient. 

The Goods and Services Tax (GST), introduced in 2017, subsumed all these indirect taxes with the aim of creating a common national market by removing tax barriers across states. Under the new GST regime, there is only one indirect tax applicable throughout the country on the supply of goods and services. This major tax reform has helped simplify the indirect tax structure, eased the compliance burden, and enabled the free movement of goods across India.

This diversity of taxes at Central and State levels with incomplete input tax credits caused cascading effects and significantly increased business costs. GST aimed to remove these inefficiencies by subsuming all the indirect taxes, barring customs duty under a single tax.

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The tax is levied on every point of sale while allowing input tax credits along the entire supply chain. This helps eliminate the cascading effect of taxes, thereby reducing production and distribution costs. Creating a common national market is a key benefit expected from GST implementation.

Boosting India’s Global Competitiveness

High logistics and tax compliance costs have weakened India’s competitive edge globally. GST is helping lower transaction costs for businesses by simplifying compliance procedures and eliminating transport check posts across states.

According to World Bank research, the logistics cost for exporters is expected to decrease by as much as 3% following the GST rollout. Lower costs would make Indian products more competitive in international markets. Increased operational efficiency will also enhance India’s ranking in the World Bank’s Ease of Doing Business Index, further boosting investor confidence.

Several export promotion schemes like Merchandise Exports from India Scheme (MEIS), Export Promotion Capital Goods (EPCG) Scheme, and Duty Drawback, which used to operate under earlier tax regimes, have been transitioned into the GST framework to continue supporting India’s export competitiveness globally.

Attracting Foreign Investment

Foreign companies have often been apprehensive of investing in India owing to its complex taxation system, multiple jurisdictional issues, and lengthy dispute resolution mechanisms. GST addresses many of these concerns by bringing uniformity in state laws, procedures, and rates.

Financial Year (April-March) Total FDI Flows % Growth
2014-15 2,75,837 26%
2015-16 3,64,350 32%
2016-17 (P) 4,04,019 11%
2017-18 (P) 3,92,686 -3%

Table: Comparison of foreign direct investment (FDI) from 2014 to 2018

With a simplified tax structure, inward GST impact on foreign investment is expected to accelerate as GST makes it easier for companies to establish operations in India. By eliminating the need for multiple registrations under different laws, GST reduces compliance burden and operational costs for foreign companies.

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Reducing currency manipulation due to input tax credits lowers production costs, directly improving return on investments for foreign companies in India. Increased cost competitiveness makes India a more attractive investment destination than other developing economies with higher tax rates and complex compliance processes.

Facilitating International Trade

GST has removed the earlier complexity of cross-border transactions between India and other countries. Central excise duty and CVD on imports have been replaced by Integrated GST (IGST) under the new regime. IGST is applicable on all imports but allows input credit across the entire supply chain, including the tariffs at the time of importation.

This has eased cash flows for importers while making the Indian market more accessible for foreign exporters. Refund procedures have also been simplified for international tourists to claim GST paid on products when they leave India.

For Indian exporters, border checks and associated delays have reduced significantly. Under GST, exports are considered as zero-rated supplies, allowing exporters to claim tax credits on inputs used in manufacturing. Prompt refunds on GST paid on inputs help improve their liquidity.

By removing trade barriers between states and streamlining regulations, GST has helped integrate India with the global economy and enabled the country to reap the benefits of GST impact on international trade.

The Global Perspective on GST

Globally, the rise of GST or Value Added Tax (VAT) has been a defining feature of tax policy reform since the 1990s. More than 160 countries have adopted some form of GST or VAT over the last 30 years. Broad objectives behind this shift include raising revenues in an efficient and equitable manner, eliminating distortions caused by turnover taxes, and promoting export competitiveness.

India was one of the last major economies to adopt a nationwide GST. The relatively smooth rollout and implementation of a uniform indirect tax system in a vast and diverse country like India has been seen by many as a significant achievement. It is expected to usher in a new era of cooperative federalism as the GST Council brings together the central and state governments to decide tax policy and administration collectively.

Despite initial short-term challenges, multilateral agencies like the World Bank and IMF have lauded the revenue-neutral rate structure adopted in India’s GST design. They have appreciated the intent behind keeping rates low, allowing minimal exemptions, and maintaining tax neutrality between goods and services. Such a structure aligns India’s GST with global best practices.

However, some concerns have been expressed regarding the multiple tax slabs diverting from the one-rate GST vision. But overall, India’s GST model has been appreciated as a well-designed destination-based tax system that would support economic growth.

Global Tax Reforms and the Digital Economy

The rapid digitalization of the economy poses major challenges for tax systems globally. Traditional taxation is struggling to keep up with new digital business models utilizing mobile tech, data, user participation, and intellectual property. 

As per OECD estimates, corporate tax revenue from highly digitalized companies could jump from 10% now to 15-20% by 2023. This digital transformation requires an urgent overhaul of corporate tax to address issues that have emerged. With companies able to participate economically in a country without physical presence, concepts of nexus need rethinking. 

Category Old GST Rates New GST Rates
Railways Goods and Parts under Chapter 86 12% 18%
Metal Concentrates and Ores 5% 18%
Certain Renewable Energy Devices 5% 12%
Broadcasting, sound recordings, and licensing 12% 18%
Printed material 12% 18%
Scrap and polyurethanes 5% 18%

Table: Difference in GST Rates for some common goods & services

Data and user participation have become vital to profits, necessitating new rules on characterizing income. Overall, digitalization is rendering aspects of the existing framework inadequate. Tax systems must evolve to cover elements like significant digital presence, data collection and analysis, and new forms of value creation. Reforms are key to ensuring fairness, preventing tax avoidance in the digital economy, and safeguarding tax revenues.

In response to these challenges, GST impact on international trade reforms is underway, focused on two pillars – reallocating taxing rights between source and residence countries and setting a global minimum corporate tax rate. The reforms led by the G20-OECD Inclusive Framework aim to create a fairer tax architecture for sharing profits and taxing rights in the digital economy.

More than 130 countries have already joined the statement establishing the two-pillar solution with consensus on key policy features under both pillars. Pillar One will reallocate some taxing rights over MNEs from their home countries to the markets where their profits are earned. At the same time, Pillar Two will impose a global minimum corporate tax of 15% to deter shifting of profits to low-tax jurisdictions.

The OECD Inclusive Framework is now focused on resolving technical issues and finalizing the multilateral convention in 2023 to enable swift implementation worldwide. India has been at the forefront of the global digital tax negotiations and has indicated its support for the emerging consensus.

Aligning India’s Tax Regime with Global Standards

While India’s digital economy is still developing, it is critical to future-proof the tax system against potential base erosion and profit-shifting challenges that may emerge with its growth. India has already expanded its equalization levy in 2022 to impose taxes on e-commerce supplies and services by non-resident companies.

The 6% equalization levy aims to tax those firms that have a significant economic presence in India but are outside the scope of the domestic tax regime. However, concerns have been raised that the expanded levy could distort Indian markets. As consensus develops on Pillar 1 rules, India must realign its digital policies accordingly.

On Pillar 2, G-20 advanced economies have already legislated for a 15% global minimum tax to take effect in 2023. As a G-20 member, India will also need to implement the minimum tax for Indian MNEs as well as apply the Income Inclusion Rule to foreign MNEs operating in the country.

While concerns about loss of tax sovereignty have been raised, the global minimum tax would significantly improve India’s ability to tax foreign MNEs that currently have no taxable presence in the country. Overall, active participation in the global tax negotiations combined with progressive alignment to emerging standards will enable India to safeguard its tax base effectively.

Conclusion

GST implementation was a major achievement for cooperative federalism in India. However, India’s ability to integrate the single domestic market created under GST with the global economy through progressive tax reforms will further determine its success. As India commits to global standards of efficiency, equity, and transparency in tax policy, the positive impact of GST implementation on India’s growth and competitiveness will only amplify further.

FAQs

  • What is GST, and how does it impact the GST global tax landscape?

GST is an indirect taxing system that has helped in getting rid of multiple taxes. This new regime is poised to level up the overall economy of the country and give way to a national market. It has also been helpful in bringing down the burden of foreign compliance. 

  • Does GST help in boosting trade competitiveness?

Yes, GST has been instrumental in reducing the entire cost of logistics. The single registration has also brought down tax compliance. Trade has become more competitive with simple procedures and fewer check posts. 

  • What is the GST impact on foreign investment?

Removal of cascading taxes improves return on investments with a lesser number of disputes and low operational costs. This makes India more attractive to foreign investors compared to other developing economies.

  • How does GST impact international trade procedures?

GST has replaced multiple customs duties with a single Integrated GST for importers, easing compliance burden and cash flows. For exporters, border check posts have been reduced, improving the movement of goods. GST also allows exporters to claim input tax credits on domestic taxes paid, boosting liquidity.

  • How does GST align India with global tax reforms?

GST aligns India with global best practices of a unified and transparent destination-based tax system. It enables India to participate in ongoing OECD reforms on digital taxation and global minimum corporate tax. This will help India tax foreign digital companies and prevent profit shifting, safeguarding its tax base.

  • How does GST improve tax cooperation between the Centre and States?

GST Council brings central and state governments together to decide rates, procedures, exemptions, etc. Unlike previous individual tax regimes, this has led to cooperative federalism between the Centre and States. The success of this coordination bodes well for further reforms.

  • What challenges have been highlighted about GST?

While appreciated for its design, GST has been criticized for its complex multi-tiered rate structure, going against the one-rate vision. High compliance burden, ambiguous rules, lengthy refunds, and complex filings have added to challenges. Further rate rationalization and compliance easing have been recommended.

  • How does GST benefit the common man?

For consumers, GST has removed the previous double taxation effect, lowering the prices of goods. Prices have also been reduced due to the elimination of supply chain inefficiencies. Increased tax compliance widens the tax base, allowing lower tax rates that benefit consumers.

  • What lies ahead in India’s GST journey?

Experts say India should aim for a 2-tier GST rate structure along with a low single rate for essentials. Compliance processes should be further eased and simplified. Revenue collection should be increased by expanding the tax base. Achieving these will maximize the benefits of GST.

  • How critical is GST for India’s economic growth?

GST implementation has increased business efficiency. By integrating India into a common market, it enables economies of scale. Lower costs make the Indian industry more competitive globally. This and rising foreign investment bodes well for India’s growth ambitions. Successful GST implementation is thus critical for sustained economic progress.

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Moulik Jain

I am a seasoned marketer specializing in Tax, Finance, and MSMEs who brings a wealth of hands-on experience to demystify complex subjects, providing insightful guidance for entrepreneurs and finance enthusiasts alike.

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