Implications of GST on Indian Economy

Till now, introduction of Value Added Tax (VAT) at the state level and CENVAT at central level are considered to be largest indirect tax reforms in the country and GST is the next logical step towards making India a unified market. The biggest advantage of GST is economic unification of India. It has potential to end the long-standing distortions arising out of the differential treatment of the manufacturing and service sectors. Further, it would also improve tax compliance by making it easier for businesses to return files, pay taxes and get refunds. For importers, the input tax credit would be available for countervailing duty of customs (CVD) and additional customs duty (ACD) and thus would help them. GST would substantially enhance the competitive edge of both the manufacturing and services industry by removing the disability that domestic producers suffer from. The following are specific implications of GST on various stakeholders.

Impact of GST on Consumers and businessmen

The several types of taxes that currently exist such as excise, octroi, sales tax, CENVAT, Service tax, turnover tax etc. would come under the GST umbrella. Since this would eliminate double taxation, it might result into fall of prices; thus relieving consumers.

This is also because the GST provides tax credit at every stage of taxation from manufacturing to consumption. Currently, margin is added at every stage and tax is paid on the amount including margins. These taxes on profit and taxes on tax add to the cost of goods and services whose burden is to be borne by the final consumer. GST would provide a continuous chain of set- off from the producer’s point to the retailer’s point and would result in fall in prices. The chain of set offs would also result in better tax compliance of industry, trades and businessmen.

For businesses, the GST would make life easy because of easier compliance (due to absence of multiple taxes) and easier return filing, tax payment and refund process due to robust IT infrastructure.

Impact of GST on Services

Currently, central government levies service tax for more than 100 services. No sales tax / VAT are levied by the states on services. However, once GST is in place, the service providers would need to pay the SGST to the states. Further, there will be a common tax rate on all services. This implies that services might become costly when GST is in place.

Impact of GST on Small Businesses and Unorganized sector

The GST is not applicable until gross annual turnover crosses Rs. 10 Lakh. A few states, which have lower VAT threshold, will be at loss and the Central Government promises to compensate them. The GST is unlikely to benefit the unorganized sector because it would not get any tax credit for purchases that it makes from organized sector. Further, if a business from unorganized sector sells the goods to unorganized sector, it would not be able to pass on the benefits of setoff. Due to this, it can be expected that unorganized sector might become less competitive and may face decline. Any such decline might further aggravate the unemployment in the country.

Impact of GST on Inflation Management and GDP

The GST with its uniform taxation structure can be one of the most important steps towards achieving the task of inflation management and GDP growth. The current indirect tax regime suffers from significant cascading which leads to higher cost of goods and services consumed in the country. There are also numerous examples where the tax payers or consumers have to pay both Centre and State taxes on a single sale which adds to increased tax costs for business and consumers. Such increase costs add to the inflationary pressure in the economy.

In the GST regime, a free flow of credits across transactions decrease the tax cost for businesses. Given that both Centre and State taxes would be levied simultaneously on all supplies, the issue relating to dual taxation on certain products would also come to rest. The decrease in tax costs would boost the exports in the country. The reduction of costs in India would make our products more competitive in the international market thereby not only increasing the GDP of the country but also inflow of foreign currency. There are also estimates that GST can add 2% to GDP.

Impact of GST on Make-in-India

The ‘Make in India’ campaign is proposes to make India a world-class manufacturing hub. The tax reforms through GST will play a crucial role to attract large scale investment. The impending Goods and Service Tax (GST) promises a progressive tax system which avoids tax cascades and helps establish India as a true common market.  GST will reduce the cost of production and allows the hassle free supply of goods. This can increase the ease of doing business India.

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