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GST system: Simplicity matters
October, 01st 2009

Ine Lejeune , global indirect tax leader, PricewaterhouseCoopers, leads PwCs global indirect taxes network comprising 1,800 experts based in 118 countries. A noted expert in VAT/GST, she advises Chinese ministry of finance on that countrys ongoing VAT reform programme. Ine spoke to ET Bureau on what India should learn from global experiences as it plans to adopt the goods & services tax.

As India gears up to adopt a dual GST system with federal and state components, what all have it to learn from the experience of other countries that already have such a system, the EU in particular?

What we have in the EU is a common Vat legislation applicable to all 27 members of the Union, that is, a common framework put into identical national laws. The member states are entitled to the revenue from taxes on consumption in their jurisdictions and a small portion of such revenue is assigned to the EU federal budget by each state. The EU has a way of distributing the VAT proceeds among jurisdictions that is different from what India, I understand, is planning.

When India adopts the dual GST, it is important for it to keep the whole system simple with a Central GST law and a model state GST law that is consistently followed by all states. Ideally, both the Central and State GST should be single-rate systems. Global experience has shown that multiple rates can be problematic.

Under the EU system, 10% space is given to each country to opt for their specific rates and this has been a disaster, as is evident from a complex web of litigation being created. There is a tendency among countries that had initially gone for multiple rates to move towards a single rate; the latest example is Switzerland.

Its important that VAT/GST system does not add to the cost of doing business. Indias complex political system might not allow a single rate system at this juncture but you would do well to keep the system as simple as possible.

Being a relatively late entrant, India has the opportunity to learn from the mistakes of other countries and formulate a faultless GST system. VAT/GST system would have a smooth run with e-invoicing, e-payment, e-filing and e-audits. Europe would soon go for a fully electronic system, the economic benefits of which is estimated at $350 billion or 2% of the GDP of the Union.

For federal countries, the rules at the central level should be consistent with those for states. OECD guidelines for aligned global VAT/GST is worth following, too.

How do you define an ideal GST/VAT system and what is the model closer to that in the world now?

There are diverse VAT systems in the world. There will be 163 countries with a VAT/GST by 2012. (The Gulf Cooperation Council countries are planning to adopt the system by 2012).

The ideal system is one that would be marked by a broad base, single rate, minimum exemptions, minimal zero-rated supplies, wide definition of taxable person and a high threshold. Exemptions create an embedded VAT cost. So , it is advisable to substitute exemptions by a low standard rate. I would rate New Zealand system as the best amongst the lot; Singapore has a good system too, but the EU is still at the lower end of the ladder.

India is planning a composite GST rate of around 16% (8+8). How does this rate compare with the best systems worldwide?

The average VAT rate worldwide is 16.4% which means you are very much there. It is 19.4% in the EU and 9.88% in Asia Pacific. The average rate is 16% in South America. The highest rate of 25% exists in Norway, Sweden and Denmark while the lowest rate of 5% is in Canada and Nigeria.

There is an allegation that VAT/GST is a regressive tax as it minimises the number of tax rates to even a single rate, as a result of which low-income earners will have to fork out a relatively higher proportion of their income as consumption tax, than the rich.

The VAT/GST system is superior to other models because it can minimise hidden taxes. The system militates against cascading of taxes in B2B transactions. It is therefore non-regressive and fair to the final consumer as well. A Vat system is based on tax collection in a staged process, with successive taxpayers entitled to deduct input tax on purchases and account for output tax on sales.

Further, any negative effect on the low-income people due to lack of rate differential can be compensated by the governments in the form of special allowances and social security measures, because the VAT/GST systems equip them with a stable and predictable revenue source. Consistency is critical to the integrity of GST. The system should be as equitable and efficient as possible to overcome regressive elements.

What about the handling of VAT disputes?

In EU, the European Court of Justice is having a very effective role in pre-empting/resolving VAT-related disputes between member countries. The courts rules are binding on states and businesses and it sticks to a set of generally accepted interpretations of the VAT law provisions.

It would be crucial for India also to have an independent agency which could arbitrate and give binding rulings on centre-state/ inter-state disputes over jurisdictions and the right to tax proceeds. I understand that a dispute resolution mechanism is being thought of.

What is your position on the debate on consumption taxes versus income taxes?

I would bet on the ability of the consumption tax (VAT/GST system) to enhance economic efficiencies and bring about equity. Data show that the share of consumption taxes to total taxes is increasing in many countries.

The US is the most obvious non-VAT country. Why is it that the worlds biggest economy is not convinced of the benefits of the system?

In the US, sales tax is charged only at final sale to the final consumer. Though they may have reasons to stick to that, studies have shown that the government is missing some 40% of the revenue due to the absence of VAT.

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