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POST COVID ERA: IMPACT ON GOODS AND SERVICES TAX

By Pratha Khanna

Abstract

This article intends to explore the recent report shared by the OECD in order to strengthen the tax base of countries, especially after the covid pandemic. Further, the article establishes a connection between the newness of the GST regime, the covid era impacting the country’s economy and the new tax regime brought in place in order to tackle the challenges arising post the pandemic in terms of tax collection and exemptions. Lastly, the article aims to understand the role played by the government in ensuring a technologically advanced tax regime which is efficient and aiding in the development of the country holistically.

At the start of 2020, the world economy faced the troublesome and chaotic impact of the Covid virus leading to a worldwide pandemic and forthcoming economic downs. Amongst this, the Indian tax collection owing to Goods and Services (GST) tax has also faced an extremely low turnabout. GST was first introduced in the 2006’s in the economic budget but was later brought into the tax regime in the Indian market in 2018. The government had taken an extreme measure while imposing the same as the new tax regime would in turn invalidate the indirect taxes being collected earlier at multiple intervals. The measure of taking the country by surprise by introducing GST despite various objections raised to it, lead to a series of problems within the country. It is pertinent to note here that the new imposition of the GST had faced certain challenges in the early years by state authorities wherein the GST council had announced a compensation cess for suffering states but were unable to pay the same leading to it being more challenging for state governments to fund their local economies. Moreover, on creation of the demand to pay the same by the states, the Council had asked the states to in turn take loans from the government further leading to their ongoing debt crisis as their borrowings increased multifold. Two years post the announcement of the same, the Indian market was hit by the pandemic further affecting the states and the economic situation of the country as a whole at an unnatural and unprecedented low. 

The Covid Pandemic has started subsiding with the development of vaccines and other precautionary steps taken by the world healthcare industries, however, the implication on Goods and Services tax collection is again put to question. Moreover, with the ongoing pandemic, various businesses found themselves in an opportunist position wherein they underwent restructuring of their models in order to avoid the new GST collection. Many companies changed their production line and converted to one wherein sanitizer and other covid preventative devices were put at forefront only to encounter GST issues at a later stage. Some of these companies started losing income as opposed to the cost they had incurred leading to a disappearance of their business income completely. The education industry has also incurred various drastic measures wherein regular schooling had been stopped leading to an increase in the online education era, enormous amount of online training provided and an increase in the demand of at home online courses. All these issues raised an unavoidable question as to how the VAT collection would take place since it is obtained on the basis of supply. 

To curb these upcoming challenges, the OECD report on Tax and Fiscal Policy in Response to the Coronavirus Crisis: Strengthening Confidence and Resilience introduced and recommended certain tax policy changes so as to strengthen the economic market for countries after the Covid pandemic. The first recommendation by the OECD was focussed at broadening and creating a wider base for GST and VAT collection. The same can be done in a manner so as to include certain goods that fall outside the current tax regime and could also be used as making the deduction and exemption structure more encompassing. Further, the second recommendation details the right of every service provider and merchant to recover input tax as laying a restriction may further hamper the already struggling economies of various countries. Within this, a wider role for refund mechanism is also introduced so as make the tax system more efficient and tax payer friendly. The third recommendation related to the efficiency of the tax collection mechanism wherein the same needs to be looked at again so as to make the mechanism and the compliance procedures easier to understand further reducing chances of frauds, tax evasion etc. Lastly, the OECD recommends that the tax mechanism should be made more technologically advanced. They recommend so because, a failure of online tax collection routes could seriously impair tax collection and could further land the assesee in trouble. By bringing in these changes, the government is likely to achieve the set out targets of transparency, neutrality and efficiency in order to revive the economy and further make the tax regime more strong and unescapable. 

Various scholarly work have also pointed towards the need for a stronger tax collection mechanism. After analysing the recent fall in the trends of GST collection, it can be understood that an economy undergoing severe trauma post a pandemic situation  makes it essential for any economy to have a strong technology base. The new tax regime with the automatic dividend and other category fillings, may prove to be a better system as a whole and could also aid in the making India a more developed nation. Further, it has also been said that pillars such as localisation, cash conservation and other supply chain mechanism must be reconsidered in order to ensure that the impact of a certain tax is put on the intended individuals rather than a continuous shifting of tax burden in terms of incidence being placed on not intended persons. GST collection being in its initial phase of progression, must be rectified and altered in a manner that nor the government and neither the tax payer should be unsatisfied in terms of budget allocation and actual development of the country. It is essential to mention that even though GST is at its initial stretches, it is likely to achieve the intended outcomes especially if the government and the GST council takes apt measures to ensure development and fair treatment of individuals in terms of tax collection. 

About the Author

Pratha Khanna is a columnist at the Economics and Finance cluster of Nickeled & Dimed.

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