White paper on Computerized Financial Accounting with GST implementation

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Wikipedia

A financial transaction tax (FTT) is a levy on a specific type of financial transaction for a particular purpose. The tax has been most commonly associated with the financial sector for transactions involving intangible property rather than real property. It is not usually considered to include consumption taxes paid by consumers.

Accounting software - Wikipedia

A transaction tax is levied on specific transactions designated as taxable rather than on any other attributes of financial institutions. If an institution is never a party to a taxable transaction, then no transaction tax will be levied from it. If an institution carries out one such transaction, then it will be levied the tax for the one transaction. This tax narrower in scope than a financial activities tax (FAT), and is not directly an industry or sector tax like a Financial stability contribution (FSC), or “bank tax”, for example. These distinctions are important in discussions about the utility of financial transaction tax as a tool to selectively discourage excessive speculation without discouraging any other activity (as John Maynard Keynes originally envisioned it in 1936).

There are several types of financial transaction taxes. Each has its own purpose. Some have been implemented, while some are only proposals. Concepts are found in various organizations and regions around the world. Some are domestic and meant to be used within one nation; whereas some are multinational. In 2011 there were 40 countries that made use of FTT, together raising $38 billion (€29bn).

The year 1694 saw an early implementation of a financial transaction tax in the form of a stamp duty at the London Stock Exchange. The tax was payable by the buyer of shares for the official stamp on the legal document needed to formalize the purchase. As of 2011, it is the oldest tax still in existence in Great Britain.

In 1893, the Japanese government introduced the exchange tax, which continued until 1999. In 1893, the tax rates were 0.06% for securities and commodities and 0.03% for bonds.

The United States instituted a transfer tax on all sales or transfers of stock in The Revenue Act of 1914 (Act of 22 October 1914 (ch. 331, 38 Stat. 745)). Instead of a fixed tax amount per transaction, the tax was in the amount of 0.2% of the transaction value (20 basis points, bips). This was doubled to 0.4% (40 bips) in 1932, in the context of the Great Depression, then eliminated in 1966. By 2020, all major economies have moved to the GST (Goods and Services Tax) based tax system.

In 1936, in the wake of the Great Depression, John Maynard Keynes advocated the wider use of financial transaction taxes. He proposed the levying of a small transaction tax on dealings on Wall Street, in the United States, where he argued excessive speculation by uninformed financial traders increased volatility (see Keynes financial transaction tax below).

In 1972 the Bretton Woods system for stabilizing currencies effectively came to an end. In that context, James Tobin, influenced by the work of Keynes, suggested his more specific currency transaction tax for stabilizing currencies on a larger global scale.

In 1989, at the Buenos Aires meetings of the International Institute of Public Finance, University of Wisconsin-Madison Professor of Economics Edgar L. Feige proposed extending the tax reform ideas of John Maynard Keynes, James Tobin and Lawrence Summers, to their logical conclusion, namely to tax all transactions. Feige’s Automated Payment Transaction tax (APT tax) proposed taxing the broadest possible tax base at the lowest possible tax rate. Since financial transactions account for the greatest component of the APT tax base, and since all financial transactions are taxed, the proposal eliminates substitution possibilities for evasion and avoidance. The goal of the APT tax is to significantly improve economic efficiency, enhance stability in financial markets, and reduce to a minimum the costs of tax administration (assessment, collection, and compliance costs). The Automated Payment Transaction tax proposal was presented to the President’s Advisory Panel on Federal Tax Reform in 2005.

As the EU, European free trade, and Euro came together, various financial transaction taxes were considered openly. One non-tax regulatory equivalent of Tobin’s narrow tax, to require “non-interest bearing deposit requirements on all open foreign exchange positions”, was considered in particular but rejected. During the 1980s the Chicago School view became dominant, that speculation served a vital purpose in keeping currencies accurately reflecting the prospects of their economies, and that even very short term transactions in response to news could in fact reflect fundamental analysis.

Economic literature of the period the 1990s–2000s emphasized that derivatives and other variations in the terms of payment in trade-related transactions (so-called “swaps” for instance) provided a ready means of evading any tax other than the Automated Payment Transaction tax since it uniformly taxed all transactions. Other measures and exemptions from such transaction taxes, to avoid punishing hedging (a form of insurance for cashflows) were also proposed. These tended to lead to generally more complex schemes that were not implemented, in part due to lack of standardization of risk reporting under the Basel I framework, which was itself a response to the 1980s financial speculation crises.

However, disclosure had not kept pace with practices. Regulators and policy-makers and theorists by the 1990s had to deal with increasingly complex financial engineering and the “avoidance by a change of product mix… market participants would have an incentive to substitute out of financial instruments subject to the tax and into instruments not subject to it. In this fashion, markets would innovate to avoid the tax” as they were doing with the creation of financial derivatives. “The real issue is how to design a tax that takes account of all the methods and margins of substitution that investors have for changing their patterns of activity to avoid the tax. [as] suggested by Pollin et al. (1999).” – Palley, 2000 The global adoption of a small flat rate Automated Payment Transaction tax whose base included all transactions would eliminate evasion and avoidance possibilities since the tax would apply equally at all substitution margins. Advocates including Pollin, Palley, and Baker (2000) emphasized that transaction taxes “have clearly not prevented the efficient functioning of” financial markets in the 20th century.

Many theorists raised the issue that hedging and speculation were more of a spectrum than a distinct duality of goals. “Academic studies (e.g. Bodnar et al, 1998) show that companies usually incorporate predictions of future price levels (i.e. a ‘view’) when executing hedges (a fact which will come as no surprise to most risk management practitioners). If hedging is really just about reducing risk, then why should our expectations of future market direction have any bearing on our hedging decisions? If we hedge 50% of our exposure, instead of 80% or 100%, because we feel that the price/rate of the underlying exposure is more likely to move in our favor, does this meet the criteria for speculation?… On one level (at the extremes), there is no doubt that hedging and speculation are very different activities. However, once you move beyond the straightforward elimination of open positions, into more nuanced transactions involving complex hedging strategies or tenuous relationships between hedges and exposures, the distinction between a hedge and a bet becomes increasingly vague.

To avoid this problem, most proposals emphasized taxing clearly speculative high-volume very-short-term (seconds to hours) transactions that could not in general reflect any change of fundamental exposure or cashflow expectation. Some of these emphasized the automated nature of the trade. FTT proposals often emerge in response to specific crises. For example, the December 1994 Mexican peso crisis reduced confidence in its currency. In that context, Paul Bernd Spahn re-examined the Tobin tax, opposed its original form, and instead proposed his own version in 1995.

In the context of the financial crisis of 2007–2008, many economists, governments, and organizations around the world re-examined or were asked to re-examine, the concept of a financial transaction tax, or its various forms. As a result, various new forms of financial transaction taxes were proposed, such as the EU financial transaction tax. The outcry after this crisis had major political, legal, and economic fallout. By the 2010s the Basel II and Basel III frameworks required reporting that would help to differentiate investing from speculation. Economic thought was tending to reject the belief that they could not be differentiated, or (as the “Chicago School” had held) should not be. However, even Basel III did not require detailed enough disclosure of risk to enable a clear differentiation of hedging vs. speculation.

As another example of an FTT proposal as a warning to speculators, or a response to the crisis, in March 2016 China drafted rules to impose a genuine currency transaction tax and this was referred to in the financial press as a Tobin tax . This was widely viewed as a warning to curb shorting of its currency the yuan. It was however expected to keep this tax at 0% initially, calculating potential revenue from different rate schemes and exemptions, and not to impose the actual tax unless speculation increased.

Also in 2016 US Democratic Party POTUS nominee Hillary Clinton asserted that speculation had “placed stress on our markets, created instability, and enabled unfair and abusive trading strategies” and that as POTUS she would seek to “impose a tax on harmful high-frequency trading and reform rules to make our stock markets fairer, more open, and transparent.”. However, the term “high-frequency” implied that only a few large volume transaction players engaged in arbitrage would likely be affected. In this respect, Clinton was following the general 1990s trend to focus on automated transactions, in particular, those which could not reflect any genuine human-reviewed fundamental risk or hedge analysis.

She also vowed to “Impose a risk fee on the largest financial institutions. Big banks and financial companies would be required to pay a fee based on their size and their risk of contributing to another crisis.” How much fees would be assessed, and whether they amounted to a tax, were an active topic of speculation in the financial community, which expected them to follow Basel III definitions with further refinements.

oods and Services Tax (GST) is an indirect tax (or consumption tax) used in India on the supply of goods and services. It is a comprehensive, multistage, destination-based tax: comprehensive because it has subsumed almost all the indirect taxes except a few state taxes. Multi-staged as it is, the GST is imposed at every step in the production process, but is meant to be refunded to all parties in the various stages of production other than the final consumer and as a destination-based tax, it is collected from point of consumption and not point of origin like previous taxes.

Goods and Services Tax (GST): Chronology of Events, Structure of GST

Goods and services are divided into five different tax slabs for collection of tax: 0%, 5%, 12%, 18% and 28%. However, petroleum products, alcoholic drinks, and electricity are not taxed under GST and instead are taxed separately by the individual state governments, as per the previous tax system. There is a special rate of 0.25% on rough precious and semi-precious stones and 3% on gold. In addition a cess of 22% or other rates on top of 28% GST applies on few items like aerated drinks, luxury cars and tobacco products. Pre-GST, the statutory tax rate for most goods was about 26.5%, Post-GST, most goods are expected to be in the 18% tax range.

The tax came into effect from 1 July 2017 through the implementation of the One Hundred and First Amendment of the Constitution of India by the Indian government. The GST replaced existing multiple taxes levied by the central and state governments.

The tax rates, rules and regulations are governed by the GST Council which consists of the finance ministers of the central government and all the states. The GST is meant to replace a slew of indirect taxes with a federated tax and is therefore expected to reshape the country’s $2.4 trillion economy, but its implementation has received criticism. Positive outcomes of the GST includes the travel time in interstate movement, which dropped by 20%, because of disbanding of interstate check posts.

The reform of India’s indirect tax regime was started in 1986 by Vishwanath Pratap Singh, Finance Minister in Rajiv Gandhi’s government, with the introduction of the Modified Value Added Tax (MODVAT). Subsequently, Prime Minister P V Narasimha Rao and his Finance Minister Manmohan Singh, initiated early discussions on a Value Added Tax (VAT) at the state level.^[5] A single common “Goods and Services Tax (GST)” was proposed and given a go-ahead in 1999 during a meeting between the Prime Minister Atal Bihari Vajpayee and his economic advisory panel, which included three former RBI governors IG Patel, Bimal Jalan and C Rangarajan. Vajpayee set up a committee headed by the Finance Minister of West Bengal, Asim Dasgupta to design a GST model.^[6]

The Asim Dasgupta committee which was also tasked with putting in place the back-end technology and logistics (later came to be known as the GST Network, or GSTN, in 2015). It later came out for rolling out a uniform taxation regime in the country. In 2002, the Vajpayee government formed a task force under Vijay Kelkar to recommend tax reforms. In 2005, the Kelkar committee recommended rolling out GST as suggested by the 12th Finance Commission.^[6]

After the defeat of the BJP-led NDA government in the 2004 Lok Sabha election and the election of a Congress-led UPA government, the new Finance Minister P Chidambaram in February 2006 continued work on the same and proposed a GST rollout by 1 April 2010. However, in 2011, with the Trinamool Congress routing CPI(M) out of power in West Bengal, Asim Dasgupta resigned as the head of the GST committee. Dasgupta admitted in an interview that 80% of the task had been done.

The UPA introduced the 115th Constitution Amendment Bill on 22 March 2011 in the Lok Sabha to bring about the GST. It ran into opposition from the Bharatiya Janata Party and other parties and was referred to a Standing Committee headed by the BJP’s former Finance Minister Yashwant Sinha. The committee submitted its report in August 2013, but in October 2013 Gujarat Chief Minister Narendra Modi raised objections that led to the bill’s indefinite postponement. The Minister for Rural Development Jairam Ramesh attributed the GST Bill’s failure to the “single handed opposition of Narendra Modi”.

In the 2014 Lok Sabha election, the Bharatiya Janata Party (BJP)-led NDA government was elected into power. With the consequential dissolution of the 15th Lok Sabha, the GST Bill – approved by the standing committee for reintroduction – lapsed. Seven months after the formation of the then Modi government, the new Finance Minister Arun Jaitley introduced the GST Bill in the Lok Sabha, where the BJP had a majority. In February 2015, Jaitley set another deadline of 1 April 2017 to implement GST. In May 2016, the Lok Sabha passed the Constitution Amendment Bill, paving way for GST. However, the Opposition, led by the Congress, demanded that the GST Bill be again sent back for review to the Select Committee of the Rajya Sabha due to disagreements on several statements in the Bill relating to taxation. Finally, in August 2016, the Amendment Bill was passed. Over the next 15 to 20 days, 18 states ratified the Constitution amendment Bill and the President Pranab Mukherjee gave his assent to it.

A 21-member selected committee was formed to look into the proposed GST laws. After GST Council approved the Central Goods and Services Tax Bill 2017 (The CGST Bill), the Integrated Goods and Services Tax Bill 2017 (The IGST Bill), the Union Territory Goods and Services Tax Bill 2017 (The UTGST Bill), the Goods and Services Tax (Compensation to the States) Bill 2017 (The Compensation Bill), these Bills were passed by the Lok Sabha on 29 March 2017. The Rajya Sabha passed these Bills on 6 April 2017 and were then enacted as Acts on 12 April 2017. Thereafter, State Legislatures of different States have passed respective State Goods and Services Tax Bills. After the enactment of various GST laws, Goods and Services Tax was launched all over India with effect from 1 July 2017. The Jammu and Kashmir state legislature passed its GST act on 7 July 2017, thereby ensuring that the entire nation is brought under a unified indirect taxation system. There was to be no GST on the sale and purchase of securities. That continues to be governed by Securities Transaction Tax (STT).