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What India can learn from Singapore's GST implementation and impact

Jun 05, 2017

France has been the first nation to implement GST in order to reduce tax evasion. After that, over 140 countries have gone for GST implementation with some nations even going in for dual GST (for example, Brazil, Canada, etc.) model. Globally, several countries have experimented and implemented the Goods and Services Tax and it has the same concept everywhere. Prices will change after GST implementation gains momentum from July 1, 2017. Though it is still early to comment on the overall effect of the new tax law, India can certainly learn a lot from how other countries have done GST rollout and what the GST impact has been in those countries.

India has the Canadian model of GST. Countries like Singapore and New Zealand tax everything at a flat rate. On the other hand, Indonesia implements five positive rates, a zero rate, and more than 30 categories for exemptions. In China, GST applies only to goods as well as the provision of repairs, processing, and replacement services. The GST can only be recoverable on goods used in production and the GST tax on fixed assets cannot be recovered. In Australia, GST tax is federal, which is collected by the Center as well as distributed to States.

How did Singapore get its GST Act together

The GST was introduced in Singapore on 1 April 1994. The GST rates are more than 20% in Denmark, Austria Hungary, Sweden, and Norway, followed by France, the Netherlands, UK and Germany. Australia introduced GST rate of 10 percent. The GST rate in Singapore is low in comparison to these countries.

According to the Singapore government, the introduction of the GST corresponds to lower direct tax rates. The top personal income tax rate in Singapore was reduced from 33 to 30% whereas the company income tax rate was cut down 27 from 30%, basically lowering the direct tax burden of the working population and companies operating in Singapore. The Singapore Government claims that the GST is fairer tax since everybody is involved and that whole population contributes to the revenue. So, instead of working population paying direct taxes, residents of Singapore pay indirect taxes like GST. Governance has moved away from direct collection of taxes.

What is the GST?

GST is tax on consumption. One pays tax only when he or she consumes, in contrast to direct taxes like income tax or property tax which taxes on income earned. GST is an indirect tax because the collection is not obtained from taxpayers. Consumers pay taxes through the sellers. The sellers collect GST from consumers on behalf of the government. GST is an ad valorem tax, which means it is expressed as a percentage of the value of the good purchased. For example, GST of 4% implies a good valued at Rs. 100 is entitled to GST payment of Rs. 4–in contrast to specific tax, which is expressed in monetary terms. A tax that is say Rs. 2.50 per unit is a specific tax.

Countries have varying GST rates which fluctuate

A main aspect of GST bill implementation has been the rate. Canada reduced the rate of GST levy a couple of times after implementation. There were other countries that were forced to increase it. In Asia, countries such as Malaysia and Singapore have adopted the GST tax structure. Plus, there could an inflationary effect on prices, particularly if the rate is higher than used to be levied earlier. For example, Singapore witnessed an upward trend in inflation (1994) when it implemented the GST. Malaysia adequately coped with GST implementation.

This article was first published on LinkedIn by Muqbil Ahmar

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