How Does GST Impact the Global Tax Landscape?

GST, or Goods and Services Tax, was introduced as a crucial step towards indirect tax reform in India. Its implementation is still underway, but the primary objective was to eliminate a complex multi-tier tax regime. The aim was to create a unified national market by consolidating various state duties and most federal tax systems into a single tax structure.

More than a hundred countries are increasingly adopting their domestic national tax system to the consumption-based GST. The impact of GST has, therefore, extended to nearly all aspects of taxation in India. This includes changes in the structure, administration, compliance mechanisms, and more. It has also helped develop cross-border trade, commerce, and Indian economy integration into the global financial network.

GST and the Global Tax Landscape

GST is a comprehensive indirect tax on the manufacture, sale, and consumption of goods and services. It has fundamentally transformed India’s domestic tax system. Replacing a complex multi-tier structure with a comparatively more straightforward dual-GST model has integrated the country into a unified market. The dual-GST model comprises two components. Firstly, the Central GST is levied by the Central Government. Secondly, each State Government sets the State GST.

The Global Context and Compliance Revolution

Adopting a GST regime in India has changed the principles of indirect taxation from an ‘origin-based’ system to a ‘destination-based’ system. Earlier taxes on goods and services varied based on where they were produced. With GST, taxes are levied at the destination where goods and services are consumed. This shift has helped reduce economic distortions and increased efficiency.

India’s GST framework shares similarities with international GST/VAT models implemented in countries like Canada, Australia, Singapore, New Zealand, and several EU nations. Notably, the destination-based taxation principle and the inclusion of both goods and services under the tax net align with global GST best practices. However, India has uniquely adopted a dual-GST system, taking into account its federal structure. As a result, both the Central and State Governments levy GST concurrently, in accordance with the constitutional framework.

Most countries follow a unified GST system with a single rate for goods and services. But India has taken a differentiated approach with four tax slabs ranging from 0 to 28% and some exemptions. There are separate bands for essential goods and services, precious metals, and sin/demerit goods. This has been adopted to keep inflation under check and support economic growth during the initial years. Multiple rates pose administrative and compliance challenges and may be further streamlined going forward based on revenue considerations.

Like India, its G20 peers—Canada, Germany, the UK, South Korea, South Africa, and Australia have also adopted a differentiated rate structure, which is carefully calibrated to suit their unique economic contexts. Regarding GST rates, at around 15-18%, India’s revenue-neutral rate is comparable with the OECD average of 19%.

China is still deliberating on implementing GST nationally, while the US still needs a GST system at the federal level. GST is levied on imports in the EU, Canada, Australia, etc., contributing to as much as 15% of overall collections. India still needs to charge import GST, a gap that needs to be addressed to complete the tax coverage.

On the other hand, the GST Network (GSTN) has successfully integrated the Center and state tax administrations by creating a standard and robust IT infrastructure. As a result, processes such as registration, returns, payments, and refunds are now streamlined. Furthermore, all these processes are accessible online through a single portal managed by GSTN, making the experience more efficient and user-friendly for taxpayers. This has dramatically improved the ease of compliance. Within four years, over 13 million businesses have registered under GST.

The introduction of GST has thus overhauled India’s domestic tax structure. It has also facilitated India’s integration with the global economy through destination-based consumption tax principles, which are internationally recognized. Furthermore, the inclusive and consensus-based approach to tax governance is well-positioned to usher in the next phase of reforms. This phase, in turn, will focus on policy stability, process standardization, and rate rationalization. Consequently, these efforts are expected to enhance the efficiency and transparency of the GST framework, further improving the ease of doing business in India.

Comparison of GST in Different Countries

Table: Comparison of GST in different countries

As India aims to make GST compliance more technology-driven and real-time, it plans to leverage the capabilities of analytics and the Internet of Things (IoT). This approach will align the country more closely with global best practices in tax administration.

Also Read: GST And The Global Tax Landscape

Global Tax Harmonization and GST

As businesses expand globally and cross-border trade volumes experience phenomenal growth, governments encounter pressing challenges in establishing fair, transparent, and predictable tax regimes. These tax systems must strike a balance between safeguarding domestic interests and addressing broader economic considerations

Governments must cooperate closely to address challenges like trade imbalances, profit-shifting, and tax avoidance. This cooperation requires greater coordination of tax policies across jurisdictions. In this context, the adoption of GST in a globally consistent manner has facilitated the harmonization of tax structures. It has also supported trade integration.

By replacing antiquated sales, manufacturing, and customs taxes with a simple consumption tax system, GST has brought tax principles across countries closer. This alignment occurs through four broad dimensions:

• Tax Architecture:

  GST has provided a more unified and common tax framework for domestic and international goods and services transactions. Over 130 countries now have broad-based consumption taxes that are easier to coordinate across borders rather than disparate local taxes. Companies also find compliance easier as the principles remain the same in the home country and export markets with GST.

• Tax Rates:

  A key goal for countries implementing GST has been to keep the rates broad-based and low to reduce economic distortions and tax evasion. According to OECD estimates, the standard GST/VAT rate across countries has steadily declined from over 19% in the 1990s to 16% in 2021. This decline is attributed to improved revenues, as the expanded tax net has allowed governments to maintain reasonable rates.
  
  Countries like Singapore have rates as low as 7%. India’s GST regime has four tiers of rates, ranging from 0% to 28%. This structure achieves a revenue-neutral rate of 15-18%, which is comparable to global standards. Additionally, it leaves headroom for further rationalization.

• Common Terminologies & Definitions:

  The convergence of tax terminologies, definitions, and concepts across countries has reduced inconsistencies and complexities associated with local taxes earlier.
  
  Critical aspects like GST registration, timing of tax liability, place of supply rules, and input tax credit mechanisms have become far more commonly understood and applied across jurisdictions thanks to GST implementation.

• Administration Processes & Compliance:

  Uniform procedures and compliance processes centered around registration, refund claims, assessments, advance rulings, etc., have eased taxpayer hardships, especially for enterprises transacting across borders.
  
  This has been possible as GST, by its nature, relies on technology to enable modern tax administration systems with minimal physical touchpoints between taxpayers and tax authorities, leading to greater transparency and standardization of processes.

By bringing in tax convergence, GST has facilitated cross-border trade and commerce while giving domestic flexibility to countries. Businesses also find compliance easier while transacting globally in the GST regime. Cooperation amongst countries has increased to ensure consistency in how GST is applied across borders.

Global organizations like WTO, OECD, UNCTAD, etc., are bringing countries together to iron out mechanisms to avoid double taxation, address disputes, and get more alignment on aspects like:

• Identifying the place of taxation
• Allowing input tax credits
• Categorizing goods
• Claiming exemptions

Adopting technologies like analytics and blockchain for real-time collaboration amongst tax authorities is leading the path for greater interoperability of the GST systems across borders in the future.

Sustainability and GST 

As the world comes together to achieve sustainable development goals aimed at reducing poverty, improving health & education, addressing climate change, and building resilient infrastructure, the linkage between taxation policy and sustainability is coming to the forefront globally. Tax regimes must play a catalytic role by discouraging polluting and unhealthy practices while incentivizing green development and social welfare schemes.

GST, by its very premise of being a broad-based tax on final consumption combined with the in-built input tax credit mechanism, has shown promising implications –:

• Discouraging Resource Wastage:

  Under GST, taxpayers have an incentive to source input materials from registered dealers to claim input credit. This reduces leakage across the supply chain, directly improving the linkage between production and consumption, thereby minimizing resource wastage.

• Lowering Emissions:

  A fuller tax base covering goods and services has allowed countries to introduce environmental taxes on emissions, non-biodegradable materials, etc., discouraging polluting practices without hurting revenues. Revenue-neutral tax swaps from traditional taxes are viable.

• Implementing Innovative Schemes:

  Increased tax collections from a more formal and compliant environment have created fiscal headroom for funding sustainable development schemes covering health, education, etc., without increasing debt and deficit pressures. India has launched projects like Swachh Bharat Mission, Ayushman Bharat, etc, using incremental revenues.

• Creating Green Jobs:

  Formalizing trade channels due to standardized GST compliance across supplier networks has created job creation opportunities, especially in service sectors like warehousing, transportation, wholesale trading, etc. This enables sustainable livelihoods for youth in developing countries like India.

Thus, while primarily a consumption tax, GST has positively contributed to sustainability objectives in countries where it is implemented. It has incentivized efficiency, discouraged wastage, reduced emissions progressively, and integrated the unorganized sector by boosting job-creating small business opportunities for youth.

Developing countries have additional headroom here to raise revenues non-disruptively and invest more in health, education, and the environment.

International organizations also see merit in aligning taxation policies with sustainability goals, as highlighted in the COP27 summit.

Table: Impact of GST on Sustainable Economy

Mechanisms like taxing carbon emissions, assessing spillover risks from cross-border transactions, using tax proceeds for green infrastructure development, etc., are proposed for coordination amongst countries as part of global GST harmonization efforts.

Conclusion

Four years since its nationwide rollout, India’s GST regime has realized multiple goals it set out to achieve at the outset. It has created a unified common market, boosted tax governance transparency, lowered the compliance burden for businesses, discouraged local tax distortions, and facilitated the formalization of trade channels. This has positively impacted revenues, economic growth, jobs, and sustainability priorities.

With over 130 countries covered by some GST legislation, global harmonization efforts have received fresh impetus. This is largely due to India’s comprehensive approach to protecting goods, services, and e-commerce transactions.

As new technologies and business models evolve, the future looks promising for greater collaboration among tax administrators globally. This can be achieved by leveraging the capacities of automation, analytics, and blockchain mechanisms.

While some implementation challenges and complexities arise from uniform tax rates, they remain areas that need priority reform focus. However, the roadmap for India seems to rationalize rates and processes further in line with global benchmarks.

Developing a globally aligned e-GST portal that allows seamless cross-border trade and investment while aptly regulating overseas transactions also beckons as a logical future step.

Also Read:

GST And The Global Economy

GST: A Global Tax Revolution, Its Impact And Future Prospects

Also Listen: A guide to find correct GST SAC code

FAQs

• What is GST, and what are some of its key objectives?

GST, or Goods and Services Tax, is a broad-based consumption tax levied on the supply of goods and services. Some of its key objectives include creating a unified national market. Additionally, it seeks to reduce economic distortions by replacing complex local taxes. Another goal is to improve tax compliance and governance. Furthermore, GST aims to facilitate trade. Lastly, it plays a significant role in enhancing revenues.

• How has GST transformed domestic tax structures globally?

GST has simplified complex multi-tiered tax systems covering manufacturing, sales, services, etc., into a single tax regime in over 130 countries. Principles have moved from origin-based to destination-based taxation in line with global best practices.

• What are some variants of GST models adopted globally?

Some variants include single rate GST vs. multiple rate slabs-based structures; unified GST vs. dual model with Central & state components; coverage of only goods vs. inclusion of services; essential GST vs. broader GST plus; minimal exemptions vs more expansive exemptions, etc.

• How has GST supported trade integration and cross-border transactions?

Harmonizing tax principles like destination-based consumption and uniform documentation has made cross-border trade easier. Businesses find compliance simpler when operating across international markets that have GST systems.

• How does GST tax e-commerce and the digital economy?

A broader scope covering goods/services purchased online and offline and unified compliance processes facilitate better regulation of e-commerce transactions and players under GST.

• How does GST impact sustainable development priorities globally?

By formalizing trade channels & reducing resource wastage, it has encouraged greener production practices. Higher revenues also allow countries to allocate more funds towards UN SDG health, education, and environment goals.

• What are some challenges still there with GST adoption globally?

Varying country-specific exemptions, specific sectors not covered under GST, non-alignment of rates across countries, and administration and compliance challenges for MSMEs trading overseas pose some hurdles requiring cooperation.

• How can technology aid in the further maturation of GST regimes globally?

Aspects like e-invoicing, system integration, blockchain-based trade data exchange between tax authorities, unified registration/payment interfaces, and AI/ML-powered analytics to identify risk transactions will drive the future technology roadmap of GST.

• Which global bodies are helping countries collaborate on GST?

Organizations like the World Trade Organization (WTO), OECD, UNCTAD, World Customs Organization (WCO), CIAT, etc., work closely with country tax authorities through forums, advisory groups, and policy guidelines.

• What is the future roadmap regarding the global harmonization of GST regimes?

Priorities like arriving at common terminologies & processes, avoiding double taxation disputes, linking border taxes & import GST, integrating payment & refund mechanisms, and developing globally aligned e-GST and International GST Clearing mechanisms figure prominently in discussions.

Aaryan Singh

B.Com degree with finance and accounting Specialisation in Goods and Service Tax (GST) and taxation system Completed certification course on GST from ICAI in 2022 Online GST practitioner course completed in 2023 from Indian Institute of Skill Development and Training.

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