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One Example of How a Good and Simple Tax Should Work

Nov 21, 2017

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Late last week I was paying the Goods and Services Tax (GST) I had collected on behalf of the government, to the government.

In the process of payment, I made a mistake, which, with the benefit of hindsight I can say was a rather silly one. Basically, the entries for the state GST and integrated GST got interchanged. In the process, I ended up paying more integrated GST than I had to and less state GST than I had to.

Integrated GST is a tax which the seller must collect from the buyer on the inter-state supply of goods and services. State GST and central GST are taxes which the seller must collect from the buyer on the intra-state supply of goods and services.

Let's understand this through an example. I am based out of Mumbai in the state of Maharashtra. I write a column for a magazine, which is based out of New Delhi. In this case, when I bill the magazine (the buyer), I will raise an invoice with an integrated GST of 18 per cent.

If I write a column for a website (it could even be a magazine/newspaper) based out of Mumbai, then I will raise an invoice with a central GST of 9 per cent and a state GST of 9 per cent. The point to be noted here is that the overall rate of tax in both the cases (interstate and intrastate) is the same. Only the division is different.

Anyway, getting back to my story. Given that I hadn't paid the right amount of state GST, this meant that I had logon to the GST portal once again and pay the state GST I hadn't. The integrated GST I had already paid will now get adjusted against the payments that I will make in the months to come. The money is safe. There is nothing to worry on that front.

Of course, I didn't realise I had made a mistake while paying the GST. It was only when my chartered accountant started filing the GST return, this mistake was noticed. After this, I frantically logged on to the GST portal in order to pay the state GST, I hadn't. In fact, I almost ended up paying the integrated GST all over again. Thankfully, I noticed the mistake this time around.

In the process of making this mistake I had a rather obvious realisation. As someone who is collecting GST on behalf of the government, it doesn't matter to me whether I am collecting state GST or central GST or integrated GST. This is something that should work at the backend of the system that has been created to implement GST.

How the GST collected by the government is split between the different governments (central and states) is not something I am really bothered about. Once I have upload my returns and have paid the right amount of GST, the system should be able to figure out, using GST numbers which have state codes and the PAN number of buyer as well as the seller built into it, what proportion of the GST should go to the central government and what proportion should go to the state governments.

Given this, I as a user should simply be making an entry for the total GST that I need to pay. The GST system can then easily figure out, the various kinds of GST, given that each buying-selling transaction along with the value, is reported as well.

But that is not how the current GST system works. The backend has become the front end as well. That is how the system has been designed.

It is well worth asking why? Dear Reader, if you have ever filed an income tax return form on your own even once, you would already know the answer. When the government designs these forms, it does not keep the ease of use of the end user in mind. That's the idea with which the government has always operated. This has seeped into the GST system as well.

The success of any government system (or for that matter any system) also depends on how easy it is to use. This ease of use will make GST a good and simple tax, which it currently isn't. In case of the GST, the government has just made the laws. The actual taxes need to be collected by the seller from the buyer. The seller then needs to hand the tax over to the government. The seller also needs to file returns. Currently, this entire process that has been made extremely cumbersome.

I am no GST expert, but I am sure that if some thought was given to the entire process of filing GST returns and paying GST to the government, it could be simplified. But for that to happen, first and foremost what is needed is bureaucratic will, even more than political will.

Indian bureaucrats have never liked to make things simple for the citizens of this country, because a simple system would discourage rent-seeking, which many of them excel in. And therefore, I feel that the GST will continue to be as complicated as ever.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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13 Responses to "One Example of How a Good and Simple Tax Should Work"

P.Janardhanam

Nov 26, 2017

Gov. after Gov. find only ways to complicate procedures in their declared attempt of making things simpler for the user. Every Bank, business establishment, and others who work do business should have same type of software just like "universal keyboard " .

Like 

Rishabh

Nov 23, 2017

Sir, You have absolutely raised a genuine query. GSTR 3B is just provisional Return to pay our GST liability. It is the actual GSTR3 in which we have to pay our liability as per GST Rules from April 2018. I think that this query can be addressed in that Return Form.

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Viswanath Krishnan

Nov 22, 2017

You are absolutely correct, Sir, we are having to do all the calculation instead of GST telling us how much to pay. The site is not user friendly and very intimidating and frankly very bureaucratic . The dash board is colorless and unimpressive.

Like (1)

Vivek Joshi

Nov 21, 2017

Happy to see that you have brought out a basic problem in GST payment to the Government. Distribution of taxes collected from taxpayers between State and center should be done by the system. You have also indicated "how it can be done".
I feel the software designers can easily do it. Government has nothing to lose in the process. I am hopeful that the concerned authorities will act on your advise.

Like (1)

ramakrishnan

Nov 21, 2017

That suggestion certainly sounds sensible.Yes-the software can do a better job of sorting these taxes based on GSTN which hopefully are designed to show where tehy are based.

Like (1)

Devaki Khanna

Nov 21, 2017

Sir, I have been asking this question of my accountant and my colleagues but have yet to get a satisfactory answer. Do freelance editors have to raise GST invoices with their clients? I would really appreciate your input. Thanks!

Like (1)

cigandhi

Nov 21, 2017

gst is introduce to make life easier for people and proper tax compliance, but we are expert in making simple thing complicated,how many people will commit mistake is difficult to know india has cities,tyer 1 ,2 and 3,towns many will commit mistake ans all these people will be taken for ride though they may have paid tax for simple mistake in this complicated form,and again as there are so many amendment you will not know what is final rate. whom to blame for this mess is mistry as no body takes responsibility. god save citizen of india.

Like (1)

MANJUNATHAN BELLUR

Nov 21, 2017

Dear Mr Kaul ,

You are right . Splitting of revenue with other government has to be done by the receiver as spending of the tax you pay is decided by the governments .

If returns are not made simple , people will not be happy even tax rate is made 0 % .

Manjunathan Bellur
bnm@plannprogress.com

Like (1)

pradeep kumar nair

Nov 21, 2017

Hi Vivek,

How can I reach you to exchange an email with you? I am sorry to use the Equitymaster forum, couldnt figure any other way to ask the question.

my email is palliyillsaju@gmail.com

Thanks in advance.

Pradeep

Like (1)

Purushottam Acharya

Nov 21, 2017

Dear Sir,

This is absolutely a valid point you have made about GST system.Why the tax-payer (user ) should bother about splitting upfront the total tax into central, state or integrated in the invoice , while making payment of tax and again at the time of filing the GST returns? As you have rightly suggested, the system can be so designed to take care of all these things based on the GST registration number of the parties to the transaction.
Request you Sir, to send the suggestion to the GST Council. They really need to have a relook at the data that is available in the GST system and how it can be leveraged to further simplification.
Thanks.
With Regards,
Purushottam

Like (1)
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