National VAT/GST systems dominate world economies and are common, the elimination of multiple cascading indirect tax regimes into a single Goods and Services Tax (GST) regime overnight in India on 1 July 2017 is attracting the attention of policy makers across the world.



Return Cycles:

India could see 25 lakh more taxpayers in the tax net adding to approximately 76 lakh taxpayers that existed earlier. Businesses will be filing total of 37 returns annually. The return cycle occurs over a 10-day window with three returns being filed -GSTR-1 the sales data, GSTR-2 the purchase data, and GSTR-3 the summary data in addition to an annual return.



Dual GST and IGST:

India has two unique components. Dual GST has a common set of rules for GST but two separate spheres of controls - central and state. For a sale within a state there is Central GST (CGST) and State GST (SGST). Integrated GST (IGST) combines the two components into a single levy for interstate transactions. In Canada the state and central GST are combined but there is no dual control. IGST avoids the problems of origin based taxation for interstate movements or self-assessment of interstate movements.



The GST Council has an analog in Brazil called CONFAZ, where the states meet to set out the rates and mechanism for the state VAT called ICMS. In contrast the Indian central government is part of the tax regime. Brazil has a federal level manufacturing VAT like central excise which is not impacted by the council decisions. There is also a municipal service tax which covers the municipalities.



Multiplicity of Rates

Where most countries will not follow India will be the multiplicity of rates and an additional luxury tax and compensation cess. Almost all countries have abandoned rates in excess of the standard rate and most look to a standard and reduced rate. In China there are two tiers of rates for services and two for goods but not a compensation cess. The rate structure is confusing as businesses have to report harmonized system of nomenclature (HSN) codes for each item but tax based on the description of the item.



Businesses Need to Become Tax Intelligent:

Every business in India needs to the tax rules and its application. and become tax intelligent - a combination of human knowledge and software which can adapt to a constantly changing regime. Consider that the rates for various goods changed in a six-week window – an unprecedented degree of change – generally with state VAT, the changes were confined to the annual budget season. Many countries do not make changes in rates or application of rates for years at a time.



Need for a Robust Business Software:

The GST will continue to evolve to respond to different economic pressures which lead to small changes and adjustments during this initial period. Robust software will need to create tax modules to independently update from the rest of the business processes. .



Compliance and GSTN:

Many countries will be looking at India for its compliances and creation of the goods and service tax network (GSTN). India has moved forward to create digital ledgers which are known to the revenue authorities at any time. The submission of invoice data through the GSTN creates a public ledger of tax information which companies validate between each other.



While transactions to consumers will have the data aggregated and summarized; the B2B transactions will have more scrutiny applied. Suppliers and purchasers will have to work together to ensure that the transactions and the data representing the transactions match to be tax compliant. Both need to ensure that the invoice is correct to claim the input tax credit and this should occur before the supplier files his sales details returns (GSTR-1).



This is an impetus to correct tax treatments, rates and data at the time the transaction occurs rather than at the time of compliance, bringing correct decision making at the start of the process itself. As the GST requires standard data to be created, any error/s in the data can be picked up faster because tests can occur – for example – if a transaction is intrastate then IGST should not be applied.



Tax Gaps:

The counter-party validation has not been rolled out so widely in any other country. It can close the tax gap or the difference between the amount collected and the amount which could be collected. It can occur because of exemptions or special treatments but in many countries the tax gaps emerge because of non-compliance and tax leakage/s. This can be helpful in countries where tax rates are more than 15% like Europe and Africa.



The world will be watching India for lessons on how it can use technology to create a self-enforcing tax system. If a compliance regime like India works, it can help many countries increase tax revenue numbers without having to increase rates or broaden their tax base.

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