How is tax evaded in the current system and how will GST help in preventing it?
GST is a major reform and includes a lot of pieces. Key things to prevent tax evasion are Input Tax Credit [ITC], a massive IT backbone called GSTN and a system to monitor the movement of goods — E-way bill.
Let’s say you are buying a bottle of Boost. It is manufactured by Nestle then sold to a regional distributor who sells to a wholesaler and who gives to a retailer. When you buy from the retailer, you might or might not pay the tax. If you don’t pay tax, there is no easy way for the government to know that you didn’t. The shopkeeper happily pockets what should have gone to the government.
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In the new system, the government gets each transaction registered through its portal — GSTN and provides incentive for the major companies to follow the rules — by having the ITC. In this new system the government has to know both the buyer and seller. The ITC allows them to subtract the taxes they have to pay from the taxes they have already paid in purchasing raw materials. Thus, the bigger companies would immediately follow the rule and anyone who is buying from the big company is also forced to follow the rule as the GSTN will record both purchase and sale.
Coming to Boost, they will know what Nestle is shipping and there will be a tax on that. Nestle can adjust this tax against the raw materials like cocoa they have paid for. The distributor who gets the truck load has to now bill his wholesaler properly, without which he cannot get his input tax credit. The wholesaler now has to bill his retailer without which he cannot get his tax credit. By the time it gets to the retailer most of the tax is already paid. The government also already knows that the retailer has got 100 bottles of Boost. The retailer is now forced to bill the customer and then get an Input Tax Credit. Not billing will send the retailer into a loss as the tax is already paid for the most part before he got his bottles that he is forced to now get from the customer.
This chaining of taxes and recording it all online is the ingenious part of the system.
Simple and tougher enforcement
There were dozens of taxes before GST — levied by the central government and state government. This made it quite confusing and made it easier for businesses to escape. Now, there is a single tax and makes it far more harder to evade that one authority.
Grouping services and goods as one
Until last month, products and services were kept separate. If it is a product it will be taxed by the state government and if it is a service only the centre taxed it. The problem is that the distinction between a good and a service has been vanishing for a while now. By integrating them it makes it easy to tax them — as a single authority would tax them and at the same rate.
Avoiding tax cascading
In the previous system, there were dozens of taxes and you might be paying more taxes. The input tax credit didn’t exist for most taxes and this made a lot of companies suffer with unnecessary taxes. By bringing them together, they will pay lesser taxes and this will reduce prices. When there are unjust taxes and more taxes, there will be more incentives to cheat.