Understand The Need For A Centralised Taxation System In The Indian Economy
The basic structure of the Indian Taxation system as it exists today was established by the British. Taxes you pay go towards financing the smooth functioning of the government, and by extension, the country itself. The money earned through taxes is used by the government to fund healthcare, education, law enforcement and various other aspects of public life.
There are two types of taxes you pay: Direct and Indirect.
Types of Taxes
- Direct Tax
Direct taxes include Income Tax, Gift Tax, Capital-gains Tax and wealth tax, among others. These are levied on individual ‘entities’ which include individual people as well as groups designated as entities under the law, such as corporate entities, trusts, co-operative societies, etc.
- Indirect Tax
Value Added Tax (VAT), Octroi Tax, Customs Duty and Service Tax are examples of tax collected ‘indirectly’ from the customer by goods and service providers who in turn pay taxes to the government.
Indirect taxes are levied at every level in the supply chain, starting from manufacturing all the way up to transport and distribution. This leads to what is called the ‘cascading effect’ where taxes paid at each level accumulate by the time the product reaches the customer who then has to pay a very large amount.
Tax Collection Bodies
Further complicating the issue is the involvement of various governmental bodies in tax collection. In India, tax is collected by all three levels of government: the Centre, the State and at the Municipal or District level. Depending on the criteria, different governmental bodies are in charge of different taxes.
For example, Customs Duty is levied on imported goods coming into India, and it comes under the purview of the Central government. However, the tax levied on the transport of said goods, Octroi Tax, is collected by the State governments. This overlapping network of jurisdiction over taxation complicates matters unnecessarily, especially for the operation of businesses in the country.
The system has also been criticised for being inefficient and costly. The collection of tax at multiple points by different agencies may also provide more opportunities for corruption and evasion.
With these drawbacks in mind, a major reform towards centralising the system was introduced by the Indian government: the Goods and Services Tax bill or GST bill. What is gst in India?
Centralising Taxation and the GST Bill
The GST bill brings together the various indirect taxes under a single standardised tax that is applicable across the country. It eliminates the need for separate taxes for each level of the supply chain.
In order to help people understand and ease into the processes involved in filing under the GST bill, the authorities and several private entities have even instituted a gst helpline to answer all relevant queries.
How Does GST Help the Economy?
- Benefits To Consumer
The simplicity of a system with a single tax on all goods and services promotes transparency in the system. It also reduces the tax load on the customer. This is beneficial to both the consumer and the producer.
- Benefits to the Economy
Apart from a reduction in tax load, the bill will help businesses work more smoothly and grow across the country as the hassle of a complicated system with many different taxes is done away with.
Taking away multiple point taxation also boosts the economy as a reduction in taxation rates lead to more revenue. This will not only help increase customer expenditure but also encourage trade and promote the growth of the nation’s Gross Domestic Product or GDP. Increase in revenue and a better overall economy also helps bring down inflation.
- Administrative Benefits of GST
GST in India is backed by sophisticated digital records that make it much easier for the government to implement the bill. With the centralisation of collection and management, resulting in much less human involvement and greater transparency in the system, the bill is bound to bring down the level of corruption that has previously plagued the country.
With this bill, the government also hopes to discourage tax evasion, an unfortunate evil that runs rampant in India. The reformed structure is sure to incentivise businesses to cooperate with the government. This will improve overall tax compliance and enrich revenue collection.
Multiple indirect taxes are less cost-efficient than a single, centralised tax. GST is sure to increase government revenue by reducing costs associated with tax collection as well.
All the above-mentioned advantages help make India highly conducive to investment opportunities. According to the chief of the International Monetary Fund (IMF), Christine Lagarde, India’s move towards a centralised tax system, via GST is ‘an act of courage’. One that will take the economy towards growth and development, and thus, prosperity.