Impact of Goods and Services Tax on Indian Economy

Renowned as one of the biggest tax reform of India, GST (Goods and Services Tax) is thoroughly based on the notion of “one nation, one market, one tax”. The biggest indirect tax has come into effect on 1st July 2017 which straightforwardly unified the whole nation into one single entity. In this blog, we will try to understand the tax basics, types, and GST & its implications on the Indian economy.

What is tax?

The term tax has been derived from the Latin word “Taxo” which refers to a compulsory financial obligation, charge, or a levy that is imposed upon an individual or an entity. Such an individual or entity is mostly referred to as the taxpayer. The levy is charged by the government or an agency appointed by the government to collect the tax. In most of the countries, it is mandatory to pay different types of taxes and not paying the same may lead to different forms of fines and punishments.

What is the direct and indirect tax?

Taxes are most of the times referred to as direct taxes and indirect taxes. The denotation of these terms mostly differs in various contexts. Generally understood, direct taxes are the taxes that are levied against a certain characteristic of an individual. On the other hand, indirect taxes are mostly levied on transactions and are not dependent on who is doing the transaction. The major form of direct tax includes income tax, property tax, inheritance tax, gift tax, and corporate tax. The major form of indirect tax includes sales tax, entertainment tax, customs duty, value-added tax (VAT), service tax, and goods and services tax.

What is GST?

Goods and services tax or, most commonly referred to as “GST” is an important type of indirect tax. GST is a kind of taxing system in which taxes are assessed and charged incrementally on the value that gets increased over the production and distribution process. Hence, GST is a kind of value additive taxation system. The purpose of this kind of taxation system is to compensate for the services and resources consumed in a particular locality or a particular state. These utilised services and resources are compensated by the taxpayers in the form of GST. This kind of taxing system is now deployed widely throughout the world.

Luckily, now India also follows the GST system of taxation. It is the latest development in the Indian taxation arena, which came into effect on midnight of June 30, 2017. The system replaced the existing VAT system of tax collection. GST was introduced through the One Hundred and First Amendment to the Constitution of India. GST mechanism successfully replaced multiple categories of tax that were previously collected by the government at various levels. Currently, there are five tax brackets of GST: 0 per cent, 5 per cent, 12 per cent, 18 per cent, and 28 per cent.  Besides this, petrol & petroleum products, electricity and alcoholic drinks are not included in the GST regime.

Some of the key advantages of GST include:

  • Removal of multiple levels of taxes such as VAT, sales tax, and excise duty
  • Ease of implementation and simplification of the tax collection process
  • GST removes the cascading effects of various taxes that are levied over one another
  • The decline in prices of commodities that are in the lower tax regime
  • Streamlining of the supply chain and concentration of production process
  • Reduction in black marketing and parallel economy.

Moreover, there are certain indirect benefits of GST as well that includes: saving time and efforts and increase production and consumption of goods & services.

There are certain limitations of GST that are worth noting. The main limitations of GST include:

  • Increased costs of new software purchase to do GST accounting
  • Bringing compatibility in the pre and post GST tax rates
  • Multiple filings for organizations that having operations in many states
  • Higher tax impact on small and medium enterprises
  • Difficulty in getting employees who are versed in GST

The key impact of GST on the Indian Economy

GST is believed to be one of the biggest reforms in the Indian taxation system. The new regime is to introduce a host of changes to the overall functioning of the Indian economy. GST is also supposed to dramatically change the manner in which businesses conduct in the country. The key impacts of GST that are likely to affect Indian Economy include:

  • Reduction of the tax burden on manufacturers
  • The increasing pace of production and distribution process
  • Reduction of the travel time of trucks among various states of India

Moreover, GST will also lead to the removal of artificial trade barriers on account of multiple rates of taxes on the same commodity. The entire system will bring higher transparency in the tax collection process. GST will also bring down the existing customs duties that are charged on imports and exports. Hence, the regime is expected to make the foreign trade of India more competitive.