Economics is an exciting subject and deals with a variety of situations in a country. Students who opt for this course have to go through the matter in detail.
Students like you might the subject’s topic difficult while write it on a piece of paper.
A crucial reason for this problem is that there are too many facts available on the internet which confuses you.
Hence, to help students like you, this blog will about Goods and Services tax and how it affects the economy of a country.
What is Goods and Services tax?
The goods and service tax are levied on various products and services which are sold for domestic consumption.
The company selling goods and services remits the tax to the government. As a result, GST generates revenue for the government.
Thus, GST is a source of revenue for the government. It is also called value-added tax in most of the countries
How Goods and Services tax work?
The goods and services tax is levied on the price of the product. The buyer who purchases these products pays the sales price along with the GST to the company.
The business forwards the GST amount to the government. In some countries, GST is also known as Value-Added tax.
The implementation of GST has eliminated the payment of various taxes on a single product or service.
You will now only pay a single rate of tax for a particular product or service.
Countries with a GST
There are many countries worldwide who have implemented the GST system in different forms.
Countries like the United Kingdom, Vietnam, Spain, Italy, Brazil, Monaco, Nigeria, Canada, South Korea, Australia, and India have adopted GST structure for tax payment.
It is estimated that 160 countries have GST in other forms.
Do you know that France is the first country to adopt this tax system in the year 1954? The reason behind the imposition of a new tax system was to lower the rate of tax-evasion.
Now, to understand the topic in detail, let’s take a look at how Goods and Services tax operates.
The company selling taxable goods and services are liable to pay GST if their annual turnover exceeds the prescribed limits. This specified limit varies from countries to countries.
The amount collected will have to be remitted to the government.
Many countries have a single unified GST system. It means that the citizens of that country will pay a single tax rate.
The countries with a unified GST system join the central tax with the state tax and collects as one tax.
The central taxes include the service tax, excise duty tax, sales tax. And the state’s taxes include transfer tax, entertainment tax, luxury tax, entry tax, sin tax.
What are the benefits of Goods and Services Tax?
- Saves more money
In general belief, implementation of GST means the application of a single tax rate system.It will replace all indirect taxes applied to a product.
As a result, it will reduce the cost of products and many other services. Thus, it saves more money.
- Ease in tax filing
The implementation of GST has benefitted the businessmen as they need to pay only a single tax, so it becomes comfortable with the tax filing and documentation.
- Increase in employment opportunities
As the implementation of GST will reduce the value of the products, it will lead to an increase in the purchasing power of the people. This will increase the demand for the products.
To meet this demand, the company will also have to increase its supply. As a result, the requirement for labour will also increase.
- Increase in Gross Domestic Product
With the growing demand and supply for various goods and services, the production will also increase. Hence, it will lead to an increase in the Gross Domestic Product.
Do you know what GDP is?
GDP is the total of market prices, of all final products and services manufactured in an economy within a period.
- The rise in revenue generation:
An increase in the demand for the product will also increase the rate of revenue generation for the government.
- Reduction in cascading effect:
GST will be implemented at every stage from consumption to manufacturing.
In GST tax will have to be paid on margin amount only. It will lower the cascading effect of the tax. Hence, the price of the product will be reduced.
- Increase in the competitive product:
As GST will have a cascading effect on tax, the market will flow more with competing products. This will benefit the consumer as well as the manufacturer.
- Effortless for businesspeople:
As GST is a single tax notion, it will stop unhealthy competition among states. It will promote interstate business.
Effects of GST on a few countries
- Increase in tax rates
The GST rates range from 16 per cent to 20 per cent globally. Reduced GST rates can lower the rate of tax evasion which can be beneficial for the economy.
While implementing GST, most of the countries have imposed low tax rates. Singapore first imposed 3% GST rates in 1994.
Later it has been increased to 8% during the last few years. Singapore has also reduced the income tax rate.
GST can be beneficial for the large scale business owners, but it can be inefficient for small scale business owners, low-income groups of people or pensioners.
Singapore saw a boom of inflation after the implementation of GST. It was able to manage the possibility of inflation through price control.
- Timely payment of the input tax credit
After the implementation of GST, in Malaysia, refund of input tax credit became vital. Otherwise, it would have taken months for tax credit refunds, thus creating cash flow issues in the country.
Disadvantages of GST
- GST- compliant
Small scale industries, which are out of the GST tax system, will have to register themselves.
They are required to provide GST-complaint invoices, keep a necessary digital record and timely filing of returns.
To keep the above mandatory details make the GST structure more complicated for small scale enterprises.
- Increase in operational costs
Business will have to hire tax experts to adopt the new tax system. Thus, it will increase the value for small scale business owners as they will have to carry the additional cost of employing a professional.
Business will also have to train their workers for new tax compliance which will further increase their overhead cost.
- Online tax system
Nowadays, many businesses have switched on to online payments, online return filling. Adapting this online taxation can trouble small scale business owners.
The taxation system in the United Kingdom
United Kingdom introduced Value Added Tax in the year 1973. The VAT is the third source of revenue generation for the government. The other two sources include national insurance and income tax.
Value Added Tax is collected and monitored by Customs and HM Revenue.
The VAT is imposed on various products and services which are sold by registered companies in the UK. It is also applicable to a few products and services which are imported from outside the European country.
The VAT rate in the United Kingdom is 20% from 4 January 2011. Certain products and services are imposed with a reduced 5% VAT rate.
Almost all foods and children’s clothing are subjected to a 0% VAT rate. Other products and services are free from VAT.
According to European Union law, the rate of VAT cannot go down below 15%. In the case of public demands for any short term reduction, the European Council will have to approve it.
In the United Kingdom, VAT is considered as an indirect tax. This is because the tax is remitted to the government by the business instead of the people who actually carry the tax burden.
People, who are against the VAT system, call it as a regressive tax as poor people bears the considerable tax burden of tax by paying their available income.
While a person who supports this taxation system, calls it as a progressive tax as buyers who spend more will pay more Value Added Tax.
History of VAT
During the year 1940 to 1973 United Kingdom had a Purchase Tax. It was a consumption tax and was imposed on different rates.
The rates of the Purchase Tax varied. The more luxuriousness of the goods the more will be the tax rate.
The Purchase Tax was levied on the wholesale price of the products.
On 1 January 1973 Purchase Tax was removed, and Value Added Tax was introduced on 1 April 1973.
How does Value Added Tax operate?
All small business scale and large scale business entities selling taxable products and services and have exceeded their taxable turnover threshold will have to register under VAT system.
The threshold in the year 2018 was £85,000. Since then it is the highest threshold for VAT, worldwide.
Benefits of Value Added Tax in the UK
The Value Added Tax is charged on the goods and services manufactured inside the country.
Import goods are not imposed with the VAT rate. An import fee equal to the tax lowers the cost benefit of foreign products.
- Lowers the cost of evasion
Under the VAT taxation system, avoiding the tax at any level does not let you avoid the tax altogether. Thus, gets less chance to evade the tax which in turn generates more revenue for the government.
A seller is required to put tax amount on the sale’s receipt. This increases transparency. The tax officials can track the tax amount paid by the business.
Thus, it lowers the chances of evading the tax under the Value Added Tax system.
- Tax refunds
In United Kingdom, any amount of VAT paid on gifts or merchandise gets refunded.
All you need to do is fill some paperwork for documentation and get the due amount back.
Disadvantages of Value Added Tax in UK
- Inequality in the distribution of income
The tax rate does not affect the people with higher income as they do not require to pay more.
But for the people with meagre income bears the heavy burden of the tax. Thus, there is inequality in the distribution of income, under VAT system.
- Lowers the revenue generation of government
In the United Kingdom, any VAT paid on merchandise and gifts while on a trip, gets refunded.
Suppose, you are from America and you have purchased a handbag of $200 in London. You can fill a document and get your $40 return. The returned amount is $40 because 20% is the standard VAT rate in the UK.
This is where the revenue generation of the government gets lowered.
- Burden of paperwork
Business entities are required to go through a lot of paperwork.
Companies need to keep a record of all VAT receipts and invoices and will have to maintain all records of VAT accounting. Businesses will also have to file VAT returns for every quarter.
All the above documentations create a burden of paperwork which is unavoidable under VAT system.
- Loss of profit
Sometimes, businesses have to pay more tax for selling goods and services than the tax they paid while buying those products from other manufacturers.
Thus, it leads to a loss of profits for many small scale and large scale business owners.
- The huge burden of tax
Along with the income tax and the national insurance tax, the taxpayers are required to pay Value Added Tax.
Thus, the massive amount of tax rates creates a burden on taxpayers.
People with meagre income are the one who suffers.
Now, you are entirely aware of the taxation system and how it might positively or negatively affect the United Kingdom’s economy in the long term.
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