In our previous article, we compared Indian GST with GST. Now let us take a look at what the other countries faced post implementation of GST. Malaysia implemented GST recently in 2015. The many problems they faced and the measures they took will help us to identify how we should proceed if we are to implement GST successfully.
Lessons to learn from other countries
Singapore saw a hike in inflation when it introduced GST in 1994. It makes it more important for Indian administrators to keep tabs on prices after implementation of GSTIt was able to control the risk of inflation to an extent due to the price control administered by their Ministry.
India can consider what many countries did: initiate anti-profiteering measures at the retail level to protect consumers from price swindling.
Another lesson learnt from Malaysia is that businesses need to start early with the implementation process to be GST-ready. The Malaysian Government received strong resentment even after providing 1.5 years for GST preparedness. Given the need for businesses to undergo a radical transformation to adapt to the complex GST regime, it would be quite challenging on the tentative implementation on 1st July 2017.
High tax rates
GST rates are typically between 16 per cent and 20 per cent worldwide. Lower rates can help bring down the tax evasion rates benefitting the economy in the long run. As FM Arun Jaitely has said "What you need is a broader base of economy, for which you need a lower level of taxation.” The governments in other countries started with very low rates of interest, which the Indian politicians are not willing to start with. Singapore started with the lowest rate of 3% in the world in 1994 and gradually increased it to a maximum of 8% over the years. Singapore simultaneously cut income tax rates (both at the individual and corporate levels).While GST is efficient, it can also be regressive, especially for low-income workers or pensioners.
SMEs and large organizations at par
The Indian GST places SMEs and large organizations at par by keeping the exemption threshold very low (Rs. 20lakhs) without any tax differentiation. While large corporations have the resources to invest, change their systems and get ready for GST, it will be daunting for SMEs considering their limited resources. Our comparison chart will show most countries have higher threshold limit.
Malaysia saw wide-spread unrest and street protests by small & medium businesses in Kuala Lumpur for few months after implementation even though they enjoyed simpler systemic requirements and a much higher level of exemption threshold compared to India.
Although composition levy is available, there are many disadvantages such as no input tax credit, no taxable invoice which will deter many from availing such scheme.
GST not applicable on alcohol and petroleum products immediately
Alcohol for human consumption are being kept outside GST , with each state free to set its rates. These sectors constitute about 40% of a state’s revenue
Petroleum products will come under GST shortly but rates and provisions have not yet been specified. This is a boon to the industry because leaving out petroleum products out of GST may distort the tax structure. Also, then input credit would not be available for the manufacturers using petroleum products thus increasing costs for consumers.
Timely payment of input tax credit
Malaysia’s GST implementation showed that timely payment of input tax credit refund is vital. Unless the necessary technology infrastructure is installed, it can take months to refund tax credits, thereby creating cash flow problems for all links in a supply chain.
In India, input tax credit will be available only when the supplier has filed his GST return. If the supplier delays or files a wrong return it will delay the input credit and blocking funds. Thus organizations will require more working capital resulting in increased costs.
Delaying tax credit refunds leads to litigation and incites the supply chain to stay outside of the organized system.
Dual GST- more complications
Most countries have implemented ideal GST, with all indirect taxes grouped under one. India is going to implement dual GST with separate central and state component, which further complicates the process.
Malaysian Government released business sector wise guidance papers on tax treatment and transition. It helped organizations to have clarity about future tax practices in their business segment.
In India, ICAI hosts regular webcasts discussions to prepare businesses. However, the Indian government in its website could also publish such guidance to ensure a steady and smooth transition towards GST.
Like anything new, GST will have teething troubles. But on overcoming these troubles, the other countries saw the advantages of having a unified tax system, easy input credit, reduced compliances. The key is to be GST ready.
We at Clear Tax have understood the challenges Indian businesses and professionals are facing with the implementation of GST. Thus we are also keeping everyone up to date with GST articles, webinars, forums, discussions. We also have experts to help you with GST.