Previous Year Question
What is/are the most likely advantages of implementing the Goods and Services Tax (GST)?
It will replace multiple taxes collected by multiple authorities and will thus create a single market in India.
It will drastically reduce the Current Account Deficit of India and will enable it to increase its Foreign Exchange Reserves.
It will enormously increase the growth and size of the economy of India and will enable it to overtake China in the near future.
Select the correct answer using the code given below:
1 only
2 and 3 only
1 and 3 only
1, 2 and 3
Correct Answer: A
Detailed Solution
GST is a destination-based indirect tax imposed on the supply of goods and services. Its purpose was to integrate several Central and State indirect taxes into a coordinated tax framework.
Statement 1 is correct
GST subsumed several Central and State indirect taxes.
Major Central taxes subsumed included:
Central Excise Duty
Service Tax
Additional Excise Duties
Additional Customs Duty—CVD
Special Additional Duty—SAD
Central cesses and surcharges
Major State taxes subsumed included:
State VAT/Sales Tax
Central Sales Tax
Entry Tax and Octroi
Luxury Tax
Entertainment Tax, except when imposed by local bodies
Purchase Tax
State cesses and surcharges
GST facilitated a common tax structure, common registration framework and an Input Tax Credit chain across the country. The IGST mechanism enables tax-credit settlement for Inter-State supplies.
Consequently, GST can:
Reduce the cascading or tax-on-tax effect.
Reduce the importance of internal tax barriers.
Facilitate the creation of an integrated national market.
Improve supply-chain and logistics efficiency.
Therefore, Statement 1 is correct.
Statement 2 is incorrect
The Current Account Deficit is principally determined by:
Exports and imports of goods
Exports and imports of services
Primary income
Remittances and other secondary income
GST is a domestic indirect-tax reform. Although it may improve logistics and competitiveness, it does not automatically or drastically reduce the CAD.
Forex Reserves are principally affected by current-account and capital or financial-account flows in the Balance of Payments. Hence, the direct and certain relationship claimed in Statement 2 does not exist.
Statement 3 is incorrect
GST may improve tax compliance, formalisation, logistics efficiency and market integration. However, it cannot guarantee that India’s economy will expand enormously or overtake China in the near future.
Economic growth depends upon several variables, including:
Investment and capital formation
Productivity
Employment and human capital
Technology
Exports and global demand
Monetary and fiscal conditions
Infrastructure and institutional quality
Statement 3 is therefore exaggerated and cannot be treated as a definite advantage of GST.