Goods and services tax is a comprehensive tax charged for goods and services at the point of consumption. This means that the tax is paid at a single point and then remitted to the government by the business collecting it. Goods and services tax (GST) is added to the final price of a specific good by the retailer. The history of GST dates back to 1954 in France; since then, several countries have put in place GST tax.
How GST works
Many countries using GST system use a unified tax rate for different consumer goods and services. This allows for the charging of a flat tax rate for different goods and services. Some economies may decide to exempt certain goods from GST.
GST is an indirect tax charged only for value addition on goods on the supply chain. This means that GST is only charge on the traders’ profit margin at each stage rather than on the whole price of the commodity. It involves shifting of tax base from point of production to the point of consumption. Imports thus become subjected to GST while exports are an exemption.
Benefits of GST
Stimulates economic growth
GST systems reduces tax burden on the producers hence encouraging existing producers to produce to the maximum potential. Increased production levels will make goods more affordable in the domestic market as well as increasing global competitiveness in the international markets. Potential investors will also be attracted to invest in the production sector hence impacting both directly and indirectly on the economy of a country.
Simple and transparent
GST is simple to administer since there is only one point for tax collection. This makes it simple to monitor GST hence eliminating any possibility of tax evasion and no- tax compliance. This will ensure that the government is able to collect taxes charged on goods and services hence being in a position to finance operations.
Decrease of inflation
There is no double taxation of goods and services under GST system. This helps in reducing the tax burden on the final consumer and lowering the prices of goods and services in the economy. Low price of consumer goods translates to a reduced inflation and increased consumer purchasing power.
Reduce compliance burden
Regular Value added taxation is associated with high compliance burden in terms of costs and monitoring. This is due to a complicated tax system that requires traders to submit tax differently at each stage of supply chain. GST simplifies the taxation concept since it compiles at the tax to a single point.
Challenges associated with GST
Difficulty in shifting to a new tax system
There arises a huge challenge in understanding and putting into place a new taxation law in the economy. During the early stages, the new system is likely to face big challenges and resistance that threatens its implementation.
Misunderstanding in the transaction level
Traders in different level of the supply chain might misunderstand GST tax leading to over taxation or under taxation. This eventually leads to a spillover effect in the preceding levels in the chain of distribution that might be difficult to reverse.
Problem of compliance
Retailers and small scale traders should have point of sale registers to capture on the taxation details. This makes GST system difficult to implement for an economy that has many informal small scale traders lacking basic technological knowledge.