A mechanism of progressive taxation


Dr. D. Mukhopadhyay
India  is a country with  federal structure of Government where the  Central Government and the State Governments   both   have been empowered by the Indian Constitution to levy and collect  taxes and in certain cases only Central Government is empowered to levy and collect taxes like, Central Excise, Customs, Income Tax and    certain taxes  like, Sales Tax, Octroi,   etc.  are exclusively    levied  and collected by the State Governments . This generates a lot of fiscal administration problem.  In simplicity, Central Government is empowered to  tax services and goods up to production stage and State Governments  are empowered to  tax sale of goods. The Central Government does not have constitutional authority to levy and collect tax on sale of goods. Again, the State Governments do not have power to levy and collect tax on supply of services.  More than 165 countries across the globe have introduced Goods and Services Tax  so far . Canada, France  United Kingdom, Singapore, New Zealand, Hong Kong, European Union , United States of America  etc.  are the forerunners in  practice of Goods and Services Tax(GST)).
In India, indirect taxes  are levied and collected at multi points under the governance of multiple fiscal legislations and  consequently  there is    for obvious reason  tax on tax phenomenon. Under this circumstances, cascading effect   needs to be neutralized  through the process of  simplification of tax system. In India, the idea of GST was contemplated  in 2004 by the Task Force on  implementation of  the Fiscal Responsibility and Budget Management Act, 2003, named Kelkar Committee. The Kelkar Committee was convinced  that  a dual GST system shall be able to tax  almost all the goods and services  and the Indian economy shall be able  to have wider market of tax base, improve revenue collection  through  levying and collection of indirect tax and more pragmatic approach of efficient resource allocation.   Under  the Goods and Service Tax mechanism, every person  shall be liable to pay tax on output and shall be entitled  to  enjoy  credit on input tax  paid and tax shall be only  on the amount of value added . The principal aim of GST is to eliminate cascading effect i.e. tax on tax and  it will lead to  bringing about  cost competitiveness  of the products and services both at the national and international market. GST  System is  built on integration of  different taxes  and  is likely  to  give full credit for  input taxes.  GST is a comprehensive model of levying and collection of indirect tax in India and it  would replace  taxes levied  both  by the Central and State Governments.  GST would be levied  and collected  at each stage of  sale or purchase of goods or services based on input tax credit method. Under this system,  GST-registered  commercial houses  shall be entitled to claim  credit of the tax  they paid on purchase of goods and services as  a part of their  day to day  businesses.
Taxable  goods and services  shall be taxed  at a single rate in the supply chain till the goods and services reach the final  consumers and that is  why it is also known as destination based tax. In order to   introduce GST, it is necessary to amend the Constitution and ‘’ the Constitution (122nd Amendment) Bill, 2014  is lying in the Rajya Sabha which has  duly been passed by the Lok Sabha on 6th May, 2015 and the  NDA Government is not in a position to pass the said Bill  owing  to not having  majority in Rajya Sabha.  GST system is expected to be  simple, more transparent and  efficient  in  making it operational  as it is proved with the implementation in   more than 165 countries  around the globe. In GST, there shall be  two-rates structure-a rate for the necessary items and another rate  for other than those covered under the bracket of necessaries. A special rate may also be there for precious metals and a list of exempted items too. As of now, Government of India thinks that   GST rate shall be in between 20% to 23% which is definitely more than the global average rate. The global average rate is 20%. The prevailing rate of GST in Australia is 10%, France-19.6%, China-17%, Canada-5%, New Zealand-15%, Singapore-7%, USA-11.725%, United Kingdom-20% and so on.   The GST shall be  of  two versions and one is Central GST and other State GST.
The rates of both the GSTs shall  depend upon the  necessity of garnering of  revenue  by the Government of the country.  In order to  bring about efficient  administration and functioning of GST, it needs expert  professional services and Chartered Accountants (CAs) and Cost & Management Accountants (CMAs)  are the  experts  in the domain of Taxation  and they can be of great  assistance  to the Central and State Governments.  The society in general   does expect that tax  rate should be  in the bracket of low to  moderate and  it should not be regressive but progressive. It is possible to be progressive only when  tax base is widened  and more revenue can be garnered  from wider tax base  with low tax rate. Moreover, it has to ensure stability in prices of the tradable goods and services. Tax payers’ compliance, early   and faster grievance redressal mechanism and  uniformity in the  tax structure  are some of the common   expectations of society from much awaited GST  system.  If the tax system is simple and tax  payers’ friendly, government shall be able to garner  more revenue since people shall not try to practice  tax evasion and tax avoidance. Moreover, construction and housing sector should be covered by GST since it  can contribute  significant  amount revenue to   the Government.
Fast Moving Consumers Goods (FMCG) sector   after inclusion in GST may be quite useful in fueling the growth of the economy.  It is also proposed in GST that there shall be  three threshold limits with regard to  small enterprises. Basic threshold for both goods and services  shall be  Rs. 10 lakhs to Rs. 15 lakhs, gross turnover of goods up to  Rs. 1.5 Crores may be  under the jurisdiction  of States, gross turnover  of services up to Rs. 1.5 Crores  may be under the jurisdiction of the Centre and finally gross turnover of above Rs. 1.5 Crores  may be under both Centre and State. It is of utmost importance that consensus may be   arrived at among the States and pass the Constitutional Amendment Bill in the Rajya Sabha and two-third of the State Legislative Assemblies. The CMAs and CAs  are  to  play a great role  in better GST administration . GST would become the most effective mechanism of garnering fiscal revenue when the Government’s dependence on direct tax shall become secondary. In Singapore, GST came into existence in 1986 and it enables Singapore Government to shift dependence from direct taxes to indirect taxes over the years. GST is a tax on consumption and not income. Generally It encourages savings and investment instead of consumption. It may be opined that GST may be regressive instead of being progressive since low income groups of people pay more as a percentage of their income than the high income group. But in defence of this, it may be asserted that GST may be considered to be a proportional tax if tax payment is expressed as a percentage of lifetime consumption. Savings and investments are  subject to deferment of tax and it becomes subject to GST when  savings and investments are converted to  consumption.
Moreover, ultimate welfare of the society depends upon the redistribution or allocation of revenue that were collected through tax. The broad purpose of  introducing GST in India is to harmonize and bringing about unification of  multiple indirect taxes. The cost of collection of revenue  and cost compliance should be as low as possible.
Cascading and double taxation effects should be neutralized in one hand      and on the other,  voluntary compliance  may be in place when  overall tax burden on the business and consumers shall be reduced. According to the OECD Guidelines, the  generally accepted principles of taxation policy should be  based on the foundation of  neutrality, efficiency, certainty, simplicity, effectiveness and fairness and   the attention of the decision makers are invited to these issues in order to make the  proposed   GST  progressive one and its success shall be subject to note of interrogation when it becomes regressive. It has been mentioned that Indian polity  is somewhat  similar to the political system of Canada and the GST rate in Canada is just 5%  which is perhaps  the least   among all the GST practicing countries and Canada is the most successful  country in GST implementation and practice  and therefore a professional minds  become inquisitive to know what are factors behind the success of Canadian GST as it will definitely  help us   in implementing GST in India.  In Canada, GST is levied on  goods and services which constitute the major bulk of supplies. The items like  groceries, residential rents, medical services and financial services are given different status.
A business  that purchases goods and services that are consumed , used or supplied  during the course of  business dealings or commercial activities  is entitled to claim ‘input tax credit’ that  it has paid earlier. Necessary documents are to be provided along with the filing of  return for claiming the  ‘input tax credit’ which takes care  of cascading effect. GST  if implemented  shall perhaps be the  most important  and path breaking tax reforms in India. All the State Governments’ cooperation  and sacrifice of  some short term gains or benefits  are  called for  so that the122nd  Constitution Amendment Bill   is enacted in the Rajya Sabha and much awaited GST sees the light of the day. From the objectives and scope of the proposed GST it can be opined that  progressive taxation shall be  in practice and there shall be  rational and efficient allocation of resources among the States. Moreover the disputes  with regard to  distribution and division  of national income   among the States and Centre shall be settled  constitutionally.
(The author is Professor of Management, Shri Mata Vaishno Devi University, Katra, Jammu & Kashmir.)
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