January 2022

GST Reforms and Tax Exemption

GST is all set for a major overhaul. The government might be contemplating paying greater attention to major GST reforms of the Goods and Services Tax structure.

A great haul is waiting for the GST as the administration will effectively complete its five years in July next year. This will be the year when the state’s compensation will end. Thus, the government is contemplating restructuring tax slabs and reducing exemptions.

According to the reports, the consumer can witness a new system that may be characterized by three major tax rates that can probably cover most of the items for the current four, i.e., 5%, 12%, 18%, and 28%. This will be emphatically done to simplify the structure and generate profits.

The states’ loss of funds

It is to be noted that a feasible plan is being drawn out for the states that would be facing the fall of revenue that they have gathered all these years for their functioning.

Though, it is to be noted that the center will effectively compensate the state for loss of income due to the strategic implementation of the five-year GST. Thus, one can state that the states’ will be significantly worried about the end of this compensation as the states are concerned about a significant reduction in their revenue.

In a recent turn of events, the Federal Finance Minister Nirmala Sitharaman “intentionally or unknowingly” had reduced the effective GST-based tax rate from 15.5% to 11.6% of the initial earnings neutrality due to multiple tax cuts since the launch of the GST in July 2017.

The plan to strategically renew the revenues of the states

The mere reason for the revision of the tax slabs that have been set up for review is that both the state and center policymakers want to endorse the slab review to address revenue issues that might materialize after the completion of 5 years.

In order to compensate for the lost revenue, the suggestions and propositions for the inclusion of the list of items for both goods and services that are currently tax-exempt are being explored. Thus, effectively removing the tax exemption list can heavily increase the GST base. This will help not only to increase revenue but also keep the overall tax rate at a reasonable level.

In order to incorporate a less intricate tax system and to increase the revenue for the states, options for effectively merging the 5% and 12% taxes to create one rate are being explored by the authorities.

In fact, exploration of strategic plans to create slab regimes of 18% and 28% of the merged rates are also on the table for discussion.

GST reforms throughout the years, is the loss of revenue a surprise?

GST, according to the experts has been a landmark tax reform. Though, it has come under fire for its prior overestimation of revenue collection which really didn’t materialize.

But during the pandemic, the country saw a substantial increase in the revenues of the state and center, which had worked well for the government’s functioning during the pandemic. but was this increase in GST collection really a perennial source?

The answer is an emphatic no. though the estimated revenue projections have gone down in recent years, during 2021, pent-up demand had effectively led to the whopping collection of GST. On top of that, commodity prices too had resulted in a record increase in GST collections in recent months.

Therefore, the increase in the GST collection wasn’t really a permanent source of income for the state and thus, a certain loss of the same shouldn’t get the government by surprise.

But indefinitely, the loss of revenue will be an issue that needs to be considered. Another implication of such high GST collection is also that covid-related concerns have subsided, and thus consumption demand is increasing.

Making the tax system less intricate

Apart from the four major tax slabs aforementioned, 0.25% and 3% effectively apply to jewelry and precious metals. It is no news that the GST web is a complicated one with many commonly used items exempt from GST.

This creates a complex system that is emphatically prone to classification disputes and leaks. According to the report, the GST does not usually tax nearly 150 goods and over 80 services, which leads to humungous complexity in deciphering which articles are exempt and which are not.

Thus, the strategic rationalization of the GST structure is important and the need of the hour and the government can start with the major haul it is preparing.

As aforementioned, the GST collection in recent months had shown promising results. Thus, it might be a good time to simplify the pricing structure. On another note, rationalization is also needed as multiple exemptions, and rates need to converge to two or three pricing structures.

In totality, it is highly recommended that the focus should not be merely or solely on raising the effective tax rate, but on further expanding the tax base. This should be achieved by keeping taxation moderate.

Furthermore, it is to be noted that from a tax policy perspective, it’s emphatically important to remove barriers which are in the form of restrictions on the application of GST based on packaging size, price, capacity, etc., and input credit billing.

Therefore, GST may actually see a large overhaul which will include a reduction of tax slabs, and pruning of the tax exemption list.

Tags: gst collection, gst structure, tax exemption, gst exemption, gst tax system, gst rate structure, exemption under gst, gst tax exemption, gst tax structure

Explaining The Global Minimum Tax System

The global Tax system has been a hot topic for the countries for years, so much so, that the group of Seven nations, namely, France, Italy, Canada, Germany, Japan, the United Kingdom, and the United States, effectively agreed on 2021 to promote a new global tax regime.

It is to be noted that the newer global tax regime would help solve the twin goals of the tax scheme. Firstly, to effectively make large transnational corporations and companies pay more tax while operating in tax havens or where they conduct their economic activities, and secondly to severely mitigate the attractiveness of tax havens for the multinational companies in pursuit to escape paying taxes.

The need for such a tax regime to mitigate the attractiveness of the tax havens is due to the fact that transnationals effectively often try to establish their tax homes in countries with low corporate income tax rates, in order to escape the high tax regimes in their own countries.

Thus, the proposed tax regime will help in transferring transnational companies’ profits from their home countries to the countries in which they make sales.

Additionally, it is to be noted that the newer tax regime will emphatically help set a global minimum tax rate of 15% for companies and multinationals all around the world.

It is worth noting here that the newer global tax regime is being pushed forward by wealthy economies that have systematically agreed to the global minimum tax proposal. These include the G7 and G20 members that are particularly wary of seeing profits made within their borders going untaxed or escaping the grasp of western tax systems.

To talk about the monetary loss that is accruing to western countries due to operations of multinationals through safe havens stands at a whopping $500 billion, which is effectively lost in revenue each year. This corroborates the fact that the western economies are quite inclined toward restoring their lost profits over the decades.

The full story?

This gives rise to a pertinent question is the problem of a non-existential global tax system only limited to monetary losses for the counties? Perhaps, there is more to the story than what meets the eye.

It is to be noted that of the annual revenue that is lost to tax havens, around $200 billion is lost by less-developed countries as well.

Developing countries: a boon or curse?

Given the fact that even underdeveloped countries have much to lose, will these countries join the race to mitigate such discrepancies? Not quite amicably.

This is due to the fact that various tax havens like the Cayman Islands would continue to offer enough incentives and exemptions to effectively and emphatically retain investments in its economy, which are needed to drive its economic growth.

Thus, such practices will be prevalent even if the government will adhere to an international minimum rate. Thus, this will significantly lead to the reduced effect of a minimum tax regime being crafted by the wealthier countries.

But given the incentive of the less developed countries do not to adhere to the global minimum tax, the more important question that arises is whether joining the race makes any sense for less-developed countries?

Though, according to the reports, there is effectively no guarantee that a global minimum rate of 15% would anyway shift investments from current tax havens to less-developed countries. Thus, the developed county’s proposal may partially bear fruits.

Though, the developing economies cannot be chastised or criticized for not adhering to the regime as they face enormous pressures to attract foreign capital for growth. Thus, they effectively cannot be faulted for this desire.

Though, it is to be noted that though finance might seem like the most viable and tantalizing option to grow, more effectively basic infrastructure, sound fiscal policies, and conditions, stable government, etc. play a larger role.

Thus, if the larger implication of the global minimum tax policy is to be scrutinized, it can be stated that it will at least contribute to the process of elimination of the temptation for other less-developed countries to systematically join the race to the bottom. In fact, according to the reports, we might even encounter beneficial changes in policies in the current tax havens.

Thus, given the aforementioned arguments, one can effectively argue that the minimum tax regime will bore well for the developed countries in order to attain its lost revenues but for the developing economies, the answer remains more complicated.

With the tantalizing benefits of investments in the economy that are presented to the developing countries, it is quite arduous to make a stance about the feasibility of the global minimum tax regime. With much more to lose, in terms of infrastructure, revenues, labor utility, etc. one can argue that the case for the developing countries is quite delicate and complex.

Thus, in totality, it can be maintained that the minimum tax regime has immense advantages for some well not much for others. Thus, it is a boon for the developed countries but for undeveloped countries, it is too soon to tell.

Tags: global tax regime, global tax, global minimum corporate tax, international tax, global corporate tax, g7 global tax, world tax, minimum global tax, global minimum tax deal, global tax system