GST and Governance: Unintended Implications on the Poor and MSMEs

Abstract

Goods and Service Tax (GST) or Value Added Tax (VAT) was first introduced in France in 1954 and now more than 160 countries around the world have the system. Any type of tax on goods and services is an indirect tax and is by nature a regressive tax. Palil and Ibrahim (2011) found that rates of GST in high-income or developed countries range from 7% (Singapore) to 42.58% (Argentina). The average rate of GST in developing and developed countries is 12% and 21% respectively. Table 1, shows the GST rates for some countries. Though GST has been implemented in several countries, its success has been mixed and restricted predominantly to developed countries. Gober and Burns (1997) and Gold (1991) have found that changing even one of the components of the tax structure of a country has a very varied impact on the economic growth of that nation. It is, therefore, important for a country to predict and find the optimum rate of each tax when designing and before implementing a new tax structure, to avoid burdening the consumption as well as economic growth of the country. Palil and Ibrahim (2011) study the short-term effects of the implementation of GST in Australia in 2000. They find that GST had a significant impact on inflation only in the period just after the implementation. Further, the anticipation of GST increased consumption just prior to implementation and reduced it in the quarter after implementation, indicating the inflationary impact was due to pre-GST hoarding and not GST itself. Hakim et al. (2016) concluded that though GST was implemented in more than 140 countries, it had a positive impact only in developed countries. Given the mixed experiences that countries have had with GST implementation, a developing country deciding to shift to this particular regime has to have pertinent reasons, and yet, is a change that intrigues academic curiosity.