India’s GST of 28%: Is This A Valid Benchmark?

The concept of goods and services tax (“GST”) is not new to the world. About 160 countries have opted to adopt GST as a tax mode. France was the first country to introduce this tax regime in 1954. Some others have dual-GST model, like Brazil and Canada – a structure where both Federal and State have powers to levy and collect taxes. India’s GST is essentially under five brackets: 0%, 5%, 12%, 18% and 28%. Its top bracket (of 28%) is the highest rate and exceeds that of Argentina (27%). On average, it is around 18%. More developed economies have rates set between 19-20%, which they use to support social services and benefits.

In India, majority of tax revenues is indirect. Less than 3% pay income tax. In 2016/17, direct taxes was Rs 8.47 trillion while indirect taxes constituted Rs 8.63 trillion.

The problem of GST worldwide is that it is regressive in nature – the lower income bears a higher tax burden than the higher income. The other problem is that it leads to a growing shadow economy and their structures:

(Source: https://www.valueresearchonline.com)

Germany has a shadow economy of about 15% per cent of the real economy for decades.

To evaluate GST’s performance, we should examine five indicators (implications):

·       Consumption (whether consumption is reduced which impacts GDP);

·       Production (should be neutral);

·       Inflationary pressures (could increase cost of living);

·       Compliances (creating a “Big Brother” society?  Oversight/ surveillance which impacts business sentiment); and

·       Tax buoyancy (whether tax revenues increase in the medium to long-term)

The performance of a Government has to be measured by the above indicators and not just whether it is 28% or 6%.

Update (8-Nov-2017):

Recently a friend had the following questions on impact of GST in Malaysia (27 Oct 2017).

“How does Malaysia measure up on the five criteria – consumption, production, inflation, compliances and tax buoyancy?”

Positive effects	Neutral	Perceived Negative Impact
1. Compliances -Strong effort on enforcement	1. Production -A slight drop perceived due to consumption decline	1. Inflation -higher at 4% or more
2. Tax buoyancy -collected over RM42b in 2016 compared to RM18b under SST		2. Consumption -dropped significantly with increase in prices – effect of which include closure of Giant outlets and others

From a Government perspective therefore, the tax is useful and increased Government revenue substantially in the immediate term. From a consumer and retail perspective it has negatively impacted disposable income and turnover of retailers respectively. From the producers’ point of view, it is somewhat neutral to negative as lower consumption impacts production but hopefully this remains a short-term phenomenon.