How Does GST Impact the Global Tax Landscape?

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Published Date:  20-12-2023   Author:   moulik-jain
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GST – goods and services was introduced as an essential step towards indirect tax reform, and its implementation is yet underway in India. However, GST was implemented to eradicate a complicated multi-tier tax regime that sought to give rise to a unique national market by amalgamating all state duties and most federal tax systems into one tax.

More than a hundred countries are increasingly adopting their domestic national tax system to the consumption-based GST. The impact of GST has, therefore, covered virtually all aspects of taxation in India, including the structure, administration, compliance mechanisms, and others. It has also helped develop cross-border trade, commerce, and Indian economy integration into the global financial network.

GST and the Global Tax Landscape

As a comprehensive indirect tax levy on the manufacture, sale, and consumption of goods and services, GST has fundamentally transformed India’s domestic tax system. Replacing a complex multi-tier structure with a comparatively more straightforward dual-GST model has integrated the country into a unified market. The dual-GST model comprises the Central GST levied by the Central Government and the State GST set by each State Government.

captainbiz gst and the global tax landscape

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Adopting a GST regime in India has changed the principles of indirect taxation from an ‘origin-based’ system to a ‘destination-based’ system. Earlier taxes on goods and services varied based on where they were produced. With GST, taxes are levied at the destination where goods and services are consumed. This shift has helped reduce economic distortions and increased efficiency.

India’s GST framework bears similarities with international GST/VAT models implemented in countries like Canada, Australia, Singapore, New Zealand, and many EU nations. The destination-based taxation principle and inclusion of both goods and services under the tax net conform with global GST best practices. However, India has adopted a dual-GST system considering its federal polity, with Central and State Governments levying GST concurrently in line with the constitutional scheme.

Most countries follow a unified GST system with a single rate for goods and services. But India has taken a differentiated approach with four tax slabs ranging from 0 to 28% and some exemptions. There are separate bands for essential goods and services, precious metals, and sin/demerit goods. This has been adopted to keep inflation under check and support economic growth during the initial years. Multiple rates pose administrative and compliance challenges and may be further streamlined going forward based on revenue considerations.

Like India, its G20 peers Canada, Germany, the UK, South Korea, South Africa, and Australia have adopted a differentiated rate structure calibrated to suit their economic contexts. Regarding GST rates, at around 15-18%, India’s revenue-neutral rate is comparable with the OECD average of 19%.

China is still deliberating on implementing GST nationally, while the US still needs a GST system at the federal level. GST is levied on imports in the EU, Canada, Australia, etc., contributing to as much as 15% of overall collections. India still needs to charge import GST, a gap that needs to be addressed to complete the tax coverage.

On the compliance side, the GST Network (GSTN) has integrated Center and state tax administrations by creating a standard, robust IT infrastructure. From registration, returns, and payments to refunds – all processes from the taxpayer’s standpoint are now online via a single portal managed by GSTN. This has dramatically improved the ease of compliance. Within four years, over 13 million businesses have registered under GST.

The introduction of GST has thus overhauled India’s domestic tax structure. It has also facilitated India’s integration with the global economy through destination-based consumption tax principles, which are internationally recognized. The inclusive and consensus-based approach to tax governance is well-placed to usher in the next phase of reforms centered around policy stability, process standardization, and rate rationalization.

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Aspects India UK USA Canada
Name of GST in the country Goods and Service Tax Value Added Tax Sales Tax (State Level) Federal Goods and Service Tax & Harmonized Sales Tax
Standard Rate 0% (for food staples), 5%, 12%, 18%, and 28% (+cess on luxury items) 20% Reduced rates – 5%, exempt, zero-rated Varies by state (Highest base rate in California at 7.25%) GST 5%, and HST varies from 0% to 15%
Threshold Exemption Limit Rs. 40 lakh or Rs. 20 lakh, depending on the state and supply £85,000 Varies by state Canadian $30,000

Table: Comparison of GST in different countries

As India targets to make GST compliance further technology-driven and real-time in nature, it would be leveraging the capabilities of analytics and IoT and aligning itself closer with global best practices in tax administration.

Also Read: GST And The Global Tax Landscape

GST and Global Tax Harmonization

As business goes global and cross-border trade volumes show phenomenal growth worldwide, governments face pressing challenges in creating fair, transparent, and predictable tax regimes that balance their domestic interests with economic considerations.

Governments must also cooperate closely to address challenges like trade imbalances, profit-shifting, tax avoidance, etc., necessitating greater coordination of tax policies across jurisdictions. This is where the adoption of GST in a globally consistent manner has facilitated the harmonization of tax structures and supported trade integration.

By replacing antiquated sales, manufacturing, and customs taxes with a simple consumption tax system, GST has brought tax principles across countries closer through four broad dimensions:

  • Tax Architecture: GST has provided a more unified and common tax framework for domestic and international goods and services transactions. Over 130 countries now have broad-based consumption taxes that are easier to coordinate across borders rather than disparate local taxes. Companies also find compliance easier as the principles remain the same in the home country and export markets with GST.
  • Tax Rates: A key goal for countries implementing GST has been to keep the rates broad-based and low to reduce economic distortions and tax evasion. As per OECD estimates, the standard GST/VAT rate across countries has steadily declined from over 19% in the 1990s to 16% in 2021 as revenues have improved and the expanded tax net has allowed governments to keep rates reasonable.

    Countries like Singapore have rates as low as 7%. India’s GST regime, with four tiers of speeds ranging from 0% to 28%, achieves a revenue-neutral rate of 15-18%, which is comparable and leaves headroom for further rationalization.
  • Common Terminologies & Definitions: The convergence of tax terminologies, definitions, and concepts across countries has reduced inconsistencies and complexities associated with local taxes earlier.

    Critical aspects like GST registration, timing of tax liability, place of supply rules, and input tax credit mechanisms have become far more commonly understood and applied across jurisdictions thanks to GST implementation.
  • Administration Processes & Compliance: Uniform procedures and compliance processes centered around registration, refund claims, assessments, advance rulings, etc., have eased taxpayer hardships, especially for enterprises transacting across borders.

    This has been possible as GST, by its nature, relies on technology to enable modern tax administration systems with minimal physical touchpoints between taxpayers and tax authorities, leading to greater transparency and standardization of processes.

By bringing in tax convergence, GST has facilitated cross-border trade and commerce while giving domestic flexibility to countries. Businesses also find compliance easier while transacting globally in the GST regime. Cooperation amongst countries has increased to ensure consistency in how GST is applied across borders.

Global organizations like WTO, OECD, UNCTAD, etc., are bringing countries together to iron out mechanisms to avoid double taxation, address disputes, and get more alignment on aspects like identifying the place of taxation, allowing input tax credits, categorizing goods, claiming exemptions, etc. Adopting technologies like analytics and blockchain for real-time collaboration amongst tax authorities is leading the path for greater interoperability of the GST systems across borders in the future.

GST and Sustainable Development

As the world comes together to achieve sustainable development goals aimed at reducing poverty, improving health & education, addressing climate change, and building resilient infrastructure, the linkage between taxation policy and sustainability is coming to the forefront globally. Tax regimes must play a catalytic role by discouraging polluting and unhealthy practices while incentivizing green development and social welfare schemes.

GST, by its very premise of being a broad-based tax on final consumption combined with the in-built input tax credit mechanism, has shown promising implications –:

  • Discouraging Resource Wastage: Under GST, taxpayers have an incentive to source input materials from registered dealers to claim input credit. This reduces leakage across the supply chain, directly improving the linkage between production and consumption, thereby minimizing resource wastage.
  • Lowering Emissions: A fuller tax base covering goods and services has allowed countries to introduce environmental taxes on emissions, non-biodegradable materials, etc., discouraging polluting practices without hurting revenues. Revenue-neutral tax swaps from traditional taxes are viable.
  • Implementing Innovative Schemes: Increased tax collections from a more formal and compliant environment have created fiscal headroom for funding sustainable development schemes covering health, education, etc., without increasing debt and deficit pressures. India has launched projects like Swachh Bharat Mission, Ayushman Bharat, etc, using incremental revenues.
  • Creating Green Jobs: Formalizing trade channels due to standardized GST compliance across supplier networks has created job creation opportunities, especially in service sectors like warehousing, transportation, wholesale trading, etc. This enables sustainable livelihoods for youth in developing countries like India.

Thus, while primarily a consumption tax, GST has positively contributed to sustainability objectives in countries where it is implemented. It has incentivized efficiency, discouraged wastage, reduced emissions progressively, and integrated the unorganized sector by boosting job-creating small business opportunities for youth.

Developing countries have additional headroom here to raise revenues non-disruptively and invest more in health, education, and the environment.

International organizations also see merit in aligning taxation policies with sustainability goals, as highlighted in the COP27 summit.

Environmental Aspect GST Impact Impact
Petroleum Products (e.g., petrol, diesel, ATF) 28-40% GST Rates Higher rates discourage consumption, reducing emissions and promoting cleaner alternatives.
Coal 5% GST Moderate GST on coal may contribute to environmental conservation efforts.
E-waste Recycling Fully Exempt from GST Full exemption encourages growth in the E-waste recycling industry, aiding sustainability.
Waste Processing Services for Material Recovery 12% GST Moderate GST on waste services supports environmentally responsible waste management.
Commercial Mining and Production of Minerals 5% to 18% GST, based on mineral type Varied rates with royalties balance extraction costs, encouraging sustainable practices.
Water Conservation Services 12% GST Lower GST promotes the adoption of water-saving mechanisms, fostering sustainable water use.

Table: Impact of GST on Sustainable Economy

Mechanisms like taxing carbon emissions, assessing spillover risks from cross-border transactions, using tax proceeds for green infrastructure development, etc., are proposed for coordination amongst countries as part of global GST harmonization efforts.

Conclusion

Four years since its nationwide rollout, India’s GST regime has realized multiple goals it set out to achieve at the outset. It has created a unified common market, boosted tax governance transparency, lowered the compliance burden for businesses, discouraged local tax distortions, and facilitated the formalization of trade channels. This has positively impacted revenues, economic growth, jobs, and sustainability priorities.

With over 130 countries covered by some GST legislation, global harmonization efforts have received fresh impetus from India’s comprehensive approach to protecting goods, services, and e-commerce transactions. As new technologies and business models evolve, the future looks promising for greater collaboration among tax administrators globally by leveraging the capacities of automation, analytics, and blockchain mechanisms.

While some implementation challenges and complexity arising from uniform tax rates remain as areas needing priority reform focus, the roadmap for India seems to rationalize rates and processes further in line with global benchmarks. Developing a globally aligned e-GST portal allowing seamless cross-border trade and investment while aptly regulating overseas transactions also beckons as a logical future step.

Also Read:

GST And The Global Economy

GST: A Global Tax Revolution, Its Impact And Future Prospects

FAQs

  • What is GST, and what are some of its key objectives?

GST, or Goods and Services Tax, is a broad-based consumption tax levied on the supply of goods and services. Some of its key objectives are creating a unified national market, reducing economic distortions by replacing complex local taxes, improving tax compliance and governance, facilitating trade, and enhancing revenues.

  • How has GST transformed domestic tax structures globally?

GST has simplified complex multi-tiered tax systems covering manufacturing, sales, services, etc., into a single tax regime in over 130 countries. Principles have moved from origin-based to destination-based taxation in line with global best practices.

  • What are some variants of GST models adopted globally?

Some variants include single rate GST vs. multiple rate slabs-based structures; unified GST vs. dual model with Central & state components; coverage of only goods vs. inclusion of services; essential GST vs. broader GST plus; minimal exemptions vs more expansive exemptions, etc.

  • How has GST supported trade integration and cross-border transactions?

Harmonizing tax principles like destination-based consumption and uniform documentation has made cross-border trade easier. Businesses find compliance simpler when operating across international markets that have GST systems.

  • How does GST tax e-commerce and the digital economy?

A broader scope covering goods/services purchased online and offline and unified compliance processes facilitate better regulation of e-commerce transactions and players under GST.

  • How does GST impact sustainable development priorities globally?

By formalizing trade channels & reducing resource wastage, it has encouraged greener production practices. Higher revenues also allow countries to allocate more funds towards UN SDG health, education, and environment goals.

  • What are some challenges still there with GST adoption globally?

Varying country-specific exemptions, specific sectors not covered under GST, non-alignment of rates across countries, and administration and compliance challenges for MSMEs trading overseas pose some hurdles requiring cooperation.

  • How can technology aid in the further maturation of GST regimes globally?

Aspects like e-invoicing, system integration, blockchain-based trade data exchange between tax authorities, unified registration/payment interfaces, and AI/ML-powered analytics to identify risk transactions will drive the future technology roadmap of GST.

  • Which global bodies are helping countries collaborate on GST?

Organizations like the World Trade Organization (WTO), OECD, UNCTAD, World Customs Organization (WCO), CIAT, etc., work closely with country tax authorities through forums, advisory groups, and policy guidelines.

  • What is the future roadmap regarding the global harmonization of GST regimes?

Priorities like arriving at common terminologies & processes, avoiding double taxation disputes, linking border taxes & import GST, integrating payment & refund mechanisms, and developing globally aligned e-GST and International GST Clearing mechanisms figure prominently in discussions.

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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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