The upcoming Goods and Services Tax (GST) is designed to bring in significant change in the indirect tax system and boost direct tax collection. GST seems promising in terms of tax transparency and efficiency when compared with the current tax system. The new regime will weed out black money and implement tax efficient laws if it rolls out next year.
The current tax system can be easily violated, as an illicit transaction cannot be stopped till the time a perpetrator is identified for money laundering. Considering that black funds are often used for illegal purposes, it’s important to fix the loopholes in the current system.
GST is expected to fight the black money generation in a big way.
Additional Reading: One Tax To Bind Them All – The GST Tax
How black money is generated in the current tax system
Transactions such as VAT, excise, and service tax are not reported to the tax department, hence incomes through such transactions are never recorded in the income book, making it easy for tax defaulters to conveniently avoid paying direct as well as indirect taxes.
Both traders and customers sometimes indulge in transactions through kaccha and pakka bills in order to save taxes illicitly. Such bills, unlike legitimate bills, are written on a plain piece of paper, which are never put into accounting books.
Currently, VAT charges on goods are somewhere between 5% and 20%, depending on the type of the product and in compliance with state law. However, the Government misses out on such incomes in several instances as traders aim at increasing their margin by skipping the tax net completely and customers look at lowering product cost.
How unrecorded transactions affect the business ecosystem
Lowering of product costs by certain entrepreneurs through unaccounted transactions leads to unhealthy competition, provoking other entrepreneurs to indulge in illegitimate activities and compromise on the quality of goods, thus impacting the entire business ecosystem.
Currently, the tax rates on commodities vary from one state to another. While state ‘A’ charges, say, 5% VAT on a specific item, state ‘B’ may charge 15% on the same. Traders have to pay central sales tax on buying goods from another state. Due to different tax levels across states, people indulge in various illegal means to avoid paying taxes.
GST is expected to bring in big changes
Contrary to the present tax system, GST is aimed at simplifying the procedure and bringing in transparency to the tax structure. Once GST is implemented, with every transaction you will be required to provide a valid identification proof such as your PAN or Aadhaar number to track the tax incidences at each dealing point. This would significantly boost the fight against black money. It would be easier for the Income Tax Department to track transactions and even circulation of black money.
Post GST, there will be uniformity in the tax system across different states in the country which would, in turn, eliminate instances of tax arbitrage.
The present tax structure allows retailers to manipulate purchase data which won’t be possible with GST in place. Every deal will be recorded from beginning to end.
Under GST, a dual monitoring system has been proposed in order to enable both the central and state government to keep track of every transaction on goods and services. So, even if the state government misses out on taxes on a transaction, the central government will identify and correct it, and vice-versa.
GST will also encourage tax officials to trace out black money invested in assets such as real estate and gold.
Kaccha and pakka bills might not disappear all of a sudden, but with the tax-net tightening in the future, tax evasion will be eliminated eventually.
The new tax regime looks promising on paper in terms of cleaning up the system by fighting creation and circulation of black money, but so did the current tax system before it was implemented. Only time will tell how well it will be implemented.