The truth about who really pays 90% of GST collected

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The government has emphasised a different statistic in response to an Oxfam research that claims the poorest half of India’s population pays two-thirds of the Goods and Services Tax (GST) collected by the government while the richest 10% account for just 3-4% of GST collections: Only 22% of the GST payers, primarily major corporations with a turnover of more than $50 billion, account for 90% of the GST collected.

There are two connected components in this. The first is the place where the tax is paid, and the second is the person who actually has to pay the levy. The simple fact that most of the money is collected from a little more than a fifth of taxpayers in no way refutes the idea that the poorest half of society bears the lion’s share of the cost of indirect taxes.

GST is a consumption tax that is paid by the final consumer, whether or not they receive a clear bill for it. The GST process has the advantage that the only tax included in the price of the good or service in question is the one paid by the final customer. In the supply chain with accretive value preceding the final good or service, there is no cascading tax.

Or at least that is what would have happened if the GST had been applied to all products and services. One of the main causes of cascading tax has been the exclusion of fuel from the value-added tax; the transport cost that is added to the price that is taxed already includes non-GST taxes, leading to tax on tax.

That does not alter the fact that taxes are paid by final consumers. When it comes to the GST, the people who initially pay the tax to the government aren’t always the ones who end up paying it. Consumers pay the tax out of their own pockets, but corporations are responsible for paying it to the government.

Fast-moving consumer goods (FMCG) are sold by distributors to a lot of small retail outlets at a price that already includes the GST paid by the products. Since these retail outlets simply add a markup to generate their own margins and sell the products to end customers without a bill or without claiming input tax credit, the tax payment chain ends well before the end consumer. Yet, this does not negate the fact that the distributor, who may be among the major tax payers who make up the majority of the GST revenue collected by the government, bears the cost of the tax paid by the distributor.

Only 1.35 crore of India’s nearly six crore businesses that produce goods and services are registered with the GST network. About 15 lakh of them are composition taxpayers, or tiny businesses, who do not keep account of individual transactions and pay tax as a percentage of gross revenue on a quarterly basis and have annual turnovers of less than 75 lakh rupees (or 50 lakh in some states).

The finance minister just disclosed that just roughly a quarter of these registered taxpayers actually pay 90% of the tax. This means that measures must be taken to guarantee that more registered taxpayers pay tax on time, in addition to bringing ever-increasing numbers of productive firms under GST – even if under the composition scheme.

The answer might be to make more use of the reverse charge mechanism. A large supplier who sells to a small buyer must charge GST, collect it, and pay it to the government while also collecting any input tax credits that are owed. Like an end user, the small buyer absorbs the tax. This is OK if the tiny buyer truly represents the end user. But let’s imagine the little buyer, A, adds value to the purchase by using it as an input before selling it to another small party, B. The GST component of the tax imposed on A’s turnover will apply to this last transaction if A is registered under the composition scheme. The value that A adds is not subject to tax if A is not registered for GST.

A can be encouraged to become a taxpayer if B is a GST-paying entity by B, rather than A, levying GST on A’s supply, paying it to the government directly rather than to A, and crediting A as having imposed the tax on B.

The GST network now includes information on sales made to A, for which it paid GST to its supplier, who then paid GST to the government after claiming input tax credit. The GST network also contains information on sales made by A to B for which B has paid Tax on A’s behalf. The GST network can give A credit for the Tax he already paid when he bought the inputs, effectively reducing the GST that B will charge on A’s supply and pay to the government. This encourages A to formally join the GST system.

Reverse charge refers to the process where the buyer pays the government the GST due on the purchase directly, as opposed to paying the seller first and anticipating the seller to pay the government the GST due after claiming input tax credit. Small businesses are spared the administrative burden of collecting and remitting GST thanks to reverse charging.

The tax base of both GST and income tax would be expanded by following the GST trail of providers of bulk raw materials, such as polyester filament or steel, down the chain of value added. Increased usage of the reverse charge mechanism may persuade more small businesses to make regular GST payments.