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A PROJECT ON

“Good and Services Tax Problems and Effects of Impelementation”

Submitted By
NAVEEN SIHARE
Roll No. 97
BA LLB (HONS)
Semester X Batch XIII (B)

Submitted To
Dr. Arachana S. Gharote
(faculty of Indirect Tax )

HIDAYATULLAH NATIONAL LAW UNIVERSITY


RAIPUR CHHATTISGARH

Submission Date -6/04/2018

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DECLARATION

I, NAVEEN SIHARE, hereby declare that, the project work titled Good and Services Tax
Problems and Effects of Impelementation submitted to H.N.L.U., Raipur is record of an original
work done by me under the guidance of Dr. Arachana S.Gharote (faculty of Indirect Tax ),
Faculty Member, H.N.L.U., Raipur.

NAVEEN SIHARE
Batch X
Roll No. 97

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CONTENT
ACKNOWLEDGMENT

RESEARCH METHODOLGY

OBJECTIVE

INTRODUCTION

PROBLEMS IN IMPLEMENTING GST

PROBLEMS RELATED TO ADMINISTRATORS

PROBLEMS RELATED TO TAXPAYERS

Education

THE EFFECTS OF IMPLEMENTING VAT ON THE REVENUE AND TRADE AND


EQUITY

VAT AND REVENUE

VAT AND TRADE

VAT AND EQUITY

CONCLUSION

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ACKNOWLEDGEMENT

First & foremost, I take this opportunity to thanks Dr. Arachana S.Gharote , faculty of Indirect
tax HNLU, for allotting me this challenging topic to work on. She has been very kind in
providing inputs for this work, by way of suggestions.
I would also like to thank my dear colleagues and
friends in the University, who have helped me with ideas about this work. Last, but not the least I
thank the University Administration for equipping the University with such good library and I.T.
facilities, without which, no doubt this work would not have taken this shape in correct time.

NAVEEN SIHARE

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OBJECTIVES
To study of Goods and services of tax

To study of Problems and effect of GST

RESEARCH METHODOLGY

The method of research adopted is analytical &descriptive in nature. Secondary sources of


information have been used to give the research work a concrete structure. Websites & earticles
have been extensively referred for relying on the data. Other relevant sources as suggested by the
faculty coordinator have been referred to. Footnotes have been provided wherever required.

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INTRODUCTION
In taxation, taxpayers are taxed in two forms: whether through direct taxes such as income tax
and road tax or through indirect taxes such as the sales tax and the services tax. For direct taxes,
taxpayers will definitely realize that they are facing the tax burden since taxpayers are required
to declare their income and to pay tax accordingly to the government. However, for indirect
taxes, taxpayers usually don’t realize that they are being taxed since the amount of tax is already
accounted for with the selling price. Goods and services tax (GST) is one type of indirect taxes.
GST is also known as value added tax (VAT) (Behan & Jenkins, 2005). Although GST and VAT
have different names, they represent the same system where the cost of tax is actually borne by
the end user. However, each step in the supply chain will collect the tax and will be remitted to
the government. The supply chain can also claim back the GST included in the products they
buy. According to Singh (2007), it is well documented that a GST can be an effective form of
indirect tax. Currently, many countries such as the United Kingdom, New Zealand, Australia and
Singapore have already implemented the GST. The VAT has been adopted as part of a package
of trade liberalization, compensating for the revenue loss from the reduction of tariffs whilst
preserving the gains in production efficiency from moving producer prices closer to world prices.
At a more general level—and especially in developing countries—adoption of the VAT is often
seen as the central element in a program of modernizing tax administration, developing the use
of methods of self-assessment whose generalization is expected ultimately to ease administration
and compliance in relation to other taxes too (Keen & Lockwood, 2007).

However, there are many issues and questions raised on indirect tax reform in developing
countries that favor a reduction in trade taxes with an increase in VAT to raise revenue.
Specifically the issue of whether the VAT now in place in some developing countries is always
the best way to respond to the revenue problems arising from trade liberalization. Emran and
Stiglitz (2005) implied that substituting VAT for broader taxes is likely to reduce rather than
improve social welfare because developing countries have large informal sectors. They argued
also that the key problem with the literature supporting the use of VAT in developing countries is
that it neglects that these countries have large informal sectors.

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The purpose of this paper is to examine the factors or the problems which delay the
implementation of GST and the effects of implementing VAT on the revenue, trade and equity.
According to Singh (2007), various matters need to be considered carefully before a
comprehensive GST system can be introduced. The discussion is divided into problems related to
taxpayers and problems related to administrator/government. Next, this paper discusses the
effects of implementing GST on the revenue and trade and equity, and the final part of the paper
concludes the discussion.

PROBLEMS IN IMPLEMENTING GST

This section discusses several problems or factors that might retard the development of the GST
system which should be taken into account by the government before GST become into the force
as problems can occur on both sides of taxpayers and administrators.

PROBLEMS RELATED TO ADMINISTRATORS

Computerization and trained personnel Implementation and enforcement of GST will need
administrators to have an efficient computerization system which could carry out the task of
checking and auditing the revenues from GST. James and Zheshi (2004) proposed three things to
enhance the management and supervision of the VAT invoices. Firstly, the printing of the VAT
invoices must be further upgraded. It must have the ability of anti-counterfeit. Secondly, the
management of the VAT invoices must be based on computers, and then a network, especially
for the administration of the VAT invoices and tax collection, must be formed all over the
country. Finally, tax collectors must more strictly verify the VAT invoices with large amount. In
all, the management and supervision of the VAT invoices must have the instant information
processing capability.
Apart from this, the administrators should also be ready with well trained personnel to operate
the computerization system. The personnel should also be knowledgeable about the GST since in
the initial period, the public which does not very familiar with the new tax system will need extra
guidance from the administrators.

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From the discussion above the implementation of GST needs advance preparation, adequate
investment in tax administration because the management of the GST must have efficient
computerization system. This requires that the government spend money to buy computers and
also train the staff that will operate this computerization system in addition to provide an
extensive public education program .These considerations should be taken into account before
the GST become effective lest there will be a serious delay in the implementation of this system .
Rate of tax and exemption The government should carefully choose the most suitable tax rate so
that the tax will not burden the poor. Considerations should be made on whether the GST to be
levied at a single rate, or a higher rate to certain products which is considered luxury products
However the government will face some problems when it takes into account these
considerations. For example, if the government takes into account the poorest in the country and
offers lower tax rate on necessities this will benefit the rich more because they will spend
relatively less of their income and receive more benefits from these concessions. But if the
government imposes high rate in luxury goods, taxpayers may seek to lower their tax liability
through both legal and illegal means. Edmiston and Bird (2004) argue that imposition of high tax
rates on sales of ‘luxury’ goods are an ineffective means of increasing progressive fiscal system
and any minute ‘benefit’ attained in this fashion is unlikely to suffice to offset the costs in terms
of reduced efficiency and effectiveness of the tax. Furthermore, the government will also have to
consider products that should be exempted from GST. Usually necessity products such as food
should be exempted from tax. Kenny (2000) examined whether food should be exempted from
GST. They found that there is a strong support for GST food exemption. However implementing
the GST on a broader base will reduce the administrative cost and increase the revenue. The
broader the base the better it is for two reasons. First, with a broader base, the rate required for
any revenue is obviously lower, which means that the efficiency cost of raising revenue is
correspondingly lower. Second, administration is simpler with a broader base, in part simply
because there are fewer avenues of escape and in part because a larger proportion of all activities
are encompassed in the tax net to (Edmiston & Bird, 2004)

From this discussion it can be understood that the choice between asingle-rate and a multiple-rate
VAT depends on balancing tax administration considerations: If the government uses
differentiated rates by lowering the tax rate on necessities and imposing high rate in luxury

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goods this may increase the administration cost and will lead to reduced revenue. However, if the
government uses a single rate on broader base this will reduce the administration costs and will
increase the revenue but a single rate will affect the poorest in the country .So the government
should choose the most suitable tax rate so that the burden of tax will not be too aggressive to the
poor and should not lead to reduced revenue. Choose the most suitable tax rate and determine the
goods that should exempt are not easy for government and may take long time.
Impact on general price level In the early stage of GST implementation, the fact that the price
level will be increased cannot be denied. Since the public is still in the transitional process,
traders will go for option in pulling up the price. However, according to Singh (2007), the
introduction of GST may bring about a one-time increase in the cost of living, the probability of
it leading to inflation is not high. GST may lead to increase in consumer price at the early stage
of implementation, but GST will not have a huge effect on inflation James and Zheshi (2004)
maintain that when the VAT was introduced in China in 1994, it did not cause any inflation.
Compared with the taxation reform of 1994, the proposed transformation of the VAT is far less
complex.

Valadkhani (2005) conducted study to examine the size and duration of the goods and services
tax (GST) effect on the quarterly growth rate of the 11 groups of the consumer price index (CPI)
in Australia using the Box and Tiao intervention analysis. It was found that prices did not
increase significantly before or after the introduction of GST. Furthermore, the varying one-off
effect of GST on prices was significant in seven out of 11 CPI groups; the effect was found
insignificant for the other four CPI groups.

Based on the above discussion, it is clear that the imposition of GST by itself cannot be
considered inflationary or deflationary even if sellers able to raise price to cover what they pay
since this would constitute one time increase in their prices but would not necessarily lead to
inflation which is continuous increase in the average of price over the time.

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PROBLEMS RELATED TO TAXPAYERS

Accounting records
Most small businesses do not have a proper system to keep accounting records. But the
implementation of GST will need businesses to keep their accounting records accordingly. This
is because proper documentation and accounting records will influence in determining the
exemption threshold of the businesses. Proper documentation and accounting records will also be
useful when the government wants to perform audit and investigation.
Patterson (1990) indicates that despite the simplification of the goods and services tax announced
by the government, there are no easy solutions for small businesses. For example, under the
Singapore GST law, every GSTregistered trader has to keep the following accounting records
and source documents for at least 5 years:
(a) Business and accounting records e.g. sales book, purchase book, cashbook and GST account;
(b) Copies of tax invoices and receipts issued for sales;
(c) Suppliers’ tax invoices and import permits;
(d) Export documents e.g. bill of lading, air waybill, note of shipment or subsidiary export
certificate;
(e) Credit and debit notes; and
(f) Payment evidence e.g. bank statement and remittance advice.

These documents will lead to increase compliance costs of GST for (small firms) which are
likely to be much higher as they tend to be relatively less educated or illiterate. The fact that it is
difficult for small firms to keep appropriate records also implies that they are at a disadvantage in
the bargaining process with tax inspectors.

Education

According to Singh (2007), it is essential that the general public, in particular businesses and
traders are adequately informed about the features of the GST and the procedural requirements
before the GST legislation comes into force. This is necessary to avoid unwarranted increases in

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price of goods and services. Knowledge about GST should be spread to public especially to the
businesses parties. This is to avoid any discrepancies in implementing the system and also to
avoid the traders from pulling up the sales price which will definitely become a burden to the end
consumers .This requires a comprehensive education campaign. The campaign should involve a
wide range of stakeholders and distribution of different types of informational materials
throughout country and also should be extended to low-volume traders and consumers
From the discussion above there are two important things that taxpayers should have for
implementing the GST which are accounting records and knowledge about the features of the
GST and the procedural requirements before the GST legislation comes into force. Without
these, there is bound to be a delay in the implementation of GST because it is important that
knowledge about the features of the GST be spread to the public time before the tax becomes
effective.

THE EFFECTS OF IMPLEMENTING VAT ON THE REVENUE AND TRADE AND


EQUITY

This section discusses some serious criticisms that have recently been leveled against VAT in
DTE with respect to its effects on trade, revenue, and equity.

VAT AND REVENUE

The potential revenue which can be raised from the VAT depends on a number of factors, such
as how broad the tax base will be and the extent to which businesses will comply with the tax.
Jenkins and Kuo (2000) conducted a study in which the main purpose is to provide an analytical
framework that can be used to estimate the potential tax base and associated revenues for a VAT
in a typical developing country which, at present, has an indirect tax system containing sales,
excise taxes, and tariffs. In their study, it is assumed that the VAT will replace the sales taxes
and allow for a rationalization of the excise and tariff systems. These procedures are applied to
the economy of Nepal. It was found that because the share of the formal economy is relatively
small in a developing country; the potential tax base for a VAT is rather narrow .Hence, if a

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government of a developing country wants to rely more on the VAT over time, it must move
aggressively to broaden the base and enhance compliance.

Some other studies have also conducted on the implications for VAT of the considerably larger
underground or shadow economies found in DTE as compared to developed countries. These
studies suggest that in the presence of a substantial ‘informal’ sector, a tax like VAT that falls on
the formal sector acts to deter the growth and development of the economy as a whole .From
these studies, Erman and Stiglitz (2005) argue that substituting VAT for border taxes is likely to
reduce rather than improve social welfare because developing countries have large informal
sectors. They also argue that the key problem with the literature supporting the use of VAT in
developing countries is that it neglects that these countries have large informal sectors.
From this statement, it is noticed that substituting VAT for border taxes in developing countries
will reduce the growth and development as a result of large informal sectors in these countries
that lead to very narrow VAT tax base. This is because informal sectors are able to escape
commodity tax coverage (large number of goods or serves are exempt or zero rate) that will lead
to reduced rather than improved social welfare.
In addition, Munk (2004) asserts that the least developed countries may not benefit from the
introduction of domestic taxes as the administrative costs may outweigh the allocation benefit
and unlikely to be in the interest of developing and transition countries to give up the use of
border taxes entirely. In short his analysis suggests that it will in general not be desirable for
developing countries with a large informal sector to adopt free trade.
From this it can be concluded that implementing VAT reduces the revenue and effect the social
welfare as result of high administrative costs which outweigh benefit from implementing VAT in
developing countries.

Furthermore, if a VAT can be administered adequately, the implementation of it offers the best
way for a country to make up revenue losses from trade liberalization as result to reduce
administration cost.

Emran and Stiglitz (2007) suggest that the emphasis on value-added tax (VAT) as the main
instrument for indirect taxation is likely to result in inefficiency in resource allocation due to

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production and consumption substitutions in favor of the informal/shadow economy. They also
argue that the imposition of VAT may also retard the development of markets, especially in the
rural areas. Also these tax reform policies implemented in a large number of developing
countries are also likely to be undesirable in terms of equity. However Keen and Ligthart (2002)
have provided academic support for the IMF and World Bank recommendations for developing
countries to use VAT rather than border taxes to raise government revenue by showing that for a
small economy a cut in import duties (respectively, export taxes) combined with a point-for-
point increase in domestic consumption taxes (production taxes) increases both welfare and
public revenue.

To sum up the discussion above has argued that in order to make up the losses from substituting
VAT for border taxes and increase the welfare governments should consider two things: Firstly,
in order to increase the revenue from implementing VAT the government must move
aggressively to broaden the base. But this is not easy especially for countries that have large
informal sectors like agriculture sector and goods that are exempt from this system. Secondly,
the government should reduce the collection costs. If the collection cost is high the benefit
offered from a VAT will be reduced.

Reversal in implementing VAT on the narrow base (the tax base for a VAT is rather narrow) and
weak tax administration leads to increased collection costs will and this will reduce the revenue
and affect the social welfare.

VAT AND TRADE

The most important rationale for the original adoption of VAT in Europe was to facilitate trade
within the then-new European Community by turning sales taxes into true destination-based
consumption taxes both by ‘unsexing’ exports (and removing hidden subsidies) and by placing
the taxation of imports and domestic production on the famous level playing field (Bird, 2005).
However, some studies conducted to examine effect of implementing VAT on the international
trade found the VAT discouraged international trade and exports rather than facilitating trade
between countries especially when a number of elements of the VAT were actually imposed for

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example the imposition of high effective rates on imports, delay rebates for exports or difficulty
in obtaining it. Edmiston and Fox (2004) argued that the VAT has often been viewed as export
friendly because of the border adjustments that impose the tax on imports and rebate it on
exports. This view is derived from a theoretical perspective of tax. In fact, a number of elements
of the VAT actually imposed have a strong potential to discourage international trade and
exports, and effectively cause the VAT to operate as a tariff on both imports and exports (though
at different rates).

Desai and Hines (2002) examined the relationship between the reliance on VAT (VAT revenue
as a percent of total government revenue) and the size of exports and imports. They conclude not
only that countries relying on VAT have fewer exports and imports (relative to GDP) than
countries that do not but that the negative correlation between VAT and trade (the sum of exports
and imports) is stronger for low income countries. In short they conclude that the VAT may deter
rather than facilitate trade.

From review of previous studies, imposing VAT on imports and imposing zero rates on exports
will facilitate trade since exporters will receive rebates equal to the amount of VAT paid in the
course of producing the exported item. This of course will reduce the cost of exports and
encourage foreign importers to buy these goods and increase foreign currency in country which
can use it to import raw material or goods that it needs. In other words it is clear that the
implementation of VAT gives the country competitive advantage but this will happen when
exporters receive rebates equal to the amount of VAT paid in the course of producing the
exported item quickly without delay because delayed refund will lead to increased opportunity
cost and may make tax rate on exports much greater than zero since the tax on inputs used in the
production of exports is included until rebates. This will affect the trade and may deter the trade
especially if rebates for exports are difficult to obtain because this will lead to increased price of
exports.

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VAT AND EQUITY

In general, equity issues may be approached at two different levels. First, one may consider the
details of exactly how different taxes impose burdens on taxpayers who are in the same and
different economic circumstances.

Secondly, one may instead focus on the overall effects of taxation on the income and level of
well-being of different people (Bird, 2005). An important aspect of tax policy reform introduced
in developing countries is its emphasis on broadening the VAT base which is based on the
general presumption that a broader base will be more efficient. However according to Chan,
Gosh, and Whalley (1999), who have conducted a study to analyze tax reform options for
Vietnam through using a general equilibrium model of Vietnam, calibrated to 1995 data. The
study focused on aggregate welfare impacts as well as welfare of household groups ranked by
income. The main focus was on indirect tax reform (VAT. They found the VAT base broadening
is likely to be very regressive as previously untaxed goods are brought into the tax net which are
consumed more by the poorest segment of the population. Their estimates for Vietnam show that
such a base broadening with a uniform VAT hurts the bottom two quintiles of households
(income loss 1 percent), while the top three quintiles gain half a percent of their income.

Moreover, the point that deserves mention with respect to VAT and equity in DTE is the
importance of the shadow economy. Many DTE have a large economic sector that is effectively
not subject to direct taxation. This reality clearly should affect how one assesses the effects of
different fiscal instruments on equity. Emran and Stiglitz (2007) argued the dramatic shift in
favor of VAT as the main instrument for revenue rising in developing countries which have a
large informal sector is misguided both on efficiency and equity grounds. It is clear from
literatures above that the emphasis on broadening the VAT base will reduce the administration
cost which also disregards the differences in expenditure pattern and differences between high
level and lower income in a country. This is because it will affect the poorest in the country since
untaxed goods are brought into the tax net which are consumed more by the poorest segment of
the population. However using different rates a as result of informal sectors that escape

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commodity tax coverage (large number of goods or serves are exempt or zero rate) and imposing
high rate on formal sector will be misleading on both efficiency and equity grounds especially if
the informal sector producers produce a close substitute of the formal VAT-liable commodity,
which will lead consumer expenditure to be reallocated to the informal sector products, thereby
increasing the demand for it and getting a higher price for their product that exceeds the formal
sector producer price by exactly the amount of VAT. In other words, so the producers that
produce a close substitute of the formal VAT-liable commodity will get high profit without
bearing tax while formal sector producer may get lower profit and bearing tax. So achieving
equity is difficult through the implementation of VAT in a country that has informal sector.

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CONCLUSION

GST or VAT is not a new tax system. Most countries in the world have already adopted this
taxing system. However, in implementing GST, the government should take into consideration
several problems or factors that might retard the development of the GST system. Problems can
occur on both sides of taxpayers and administrators. Therefore, a properly planned GST system
should be looked upon before the system is introduced. For example, the public should be
properly educated with general knowledge on GST system, since the end consumers will bear the
burden of the cost of tax.

The business entities should be briefed on the administrative side since remittance of revenues to
the government will be done by the supply chain. The business entities should also be
encouraged to update their accounting records to facilitate audit and investigation process. On
the government side, well trained personnel should be provided in assisting the public. The
government should also need to determine the right GST rate so that the welfare of the lower
income citizen will not be so much affected. Decisions should also be made on the products
which are exempted from tax. Overall, the GST system is considered to be effective since it can
increase the total revenue of the government. However, the implementation will need a well
planned system since without it; a comprehensive GST system will not be achieved. But the
potential revenue which can be raised from the VAT depends on a number of factors, such as
how broad the tax base will be and the extent to which businesses will comply with the tax .So to
increase the revenue from implementing VAT the government must move aggressively to
broaden the base but this is not easy especially for countries that have large informal sector like
agriculture sector and some goods that are exempt from this system. In essence, achieving equity
is difficult from implementing VAT in a country that has informal sector since it affects the
poorest portion of its population.

The effect of value-added taxes (VATs) on international trade depends on two features of VAT
implementation, that is whether there are high effective rates on imports, and whether rebates for
exports are delayed or difficult to obtain.

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Bibliography

 Systematic Approach to Taxation: Containing Income Tax and GST : November Edition
 GST-How to Meet Your Obligations (Set of 2 Volumes) -Incorporating Notifications Issued on 14-
11-2017 (Updated Till 3-12-2017)
 Systematic Approach to Goods & Services Tax (GST) : FOR ENTREPRENEURS, TAX
PRACTITIONERS, ACCOUNTANT & STUDENT OF FINANCE COURSES SUCH AS CA/CMA/CS/LL.B &
B.COM(H)

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