Goods and Services tax.

Define GST.

It refers to goods and services tax.

-Single unified tax.

-It replaced multiple indirect taxes like excuse duty, VAT, service tax etc.

-One nation, One tax, One market.

-It is levied at every stage of supply chain. (Manufacturing, sale and consumption)

-It was done to avoid the cascading effect of the taxes that were formerly present.

What was the need to bring about a CAB for introducing GST?

-Services tax could not be collected by the state and goods tax could not be collected by the centre. Neither the state, nor the centre was entitled to impose both the taxes.

-To change the manner in which taxes were levied by centre and state, CAB had to be done.

Define cascading effect. How did input tax credit solve the issue of tax on tax that was associated with cascading effect.

Let me explain with the help of an example. Imagine that a bottle of tropicana costs 100 rupees. Previously, before the introduction of GST, the entire taxation system was faulty and burdened the economy.

Once the producer produced it at 100 rupees, it had to pay 10 percent tax.

When it reached the wholesaler, again 10 percent tax was added on that 110 rupees. Cmon I mean, if you had to add tax once more, you could have just done away with 20 percent tax at the beginning.

Now again, when the wholesaler gave it to the retailer, 10 percent tax was further imposed on 121 rupees.

Finally when it reached the consumer, the price became 133.1 rupees.

At each stage, tax on tax was imposed.

But GST aimed to tackle this problem. How? By introducing input tax credit.

How did GST solve the cascading effect that was previously there?

Producer.

Cost of production-100

GST-10 percent meaning -10 rupees.

Wholesaler-110 Rs

GST-11

111

Now on this good, 10 rupees tax was already given. So now the wholesaler has to give only 1 rupees as GST. It will get the credit later.

Retailer-111

Don’t worry for now, just know that through input tax credit the GST issue is solved.

What are the challenges of GDP?

The state that manufactures the most won’t get high GST. The state with highest consumptiom will get more GST.

-The GST is a consumption based tax and unlike any other tax that existed before.

Define tax-to -GDP ratio. What is the implication of high tax-to-GDP ratio?

It informs us the about the contribution of tax to GDP. .

It indicates that enough sources of revenue are in place for government and it strengthens the financial position of the government.

The government doesn't require to borrow money from private entities.

What is the crowding out effect?

-When the tax to GDP ratio is low, then government is forced to take loan from the banks. This leaves too little money for the private banks. So, they are not able to avail loans from the RBI and development is hampered.

Tax to GDP ratio of various countries.

India-12 percent

Canada-33 percent

Pakistan-10. 8 percent

Mexico-12 percent

Estonia-35. 8 percent.

Developed countries have higher tax to GDP ratio.

Factors contributing to low tax to GDP ratio.

-Dominance of agriculture sector.

-Large presence of the informal sector.

-Low per capita income

-Tax exemptions like reduction in corporate tax.

-Unresolved tax disputes.

India's tax to GDP ratio is low when compared to it’s counterparts. Explain the factors behind it and what can be done to improve the situation.