The Goods and Service Tax (GST) is a destination-based tax applied to goods and services sold in any jurisdiction. GST in India was in the pipeline for a long time. India’s indirect tax structure before the introduction of the GST was extremely convoluted and it had an adverse impact on the Indian economy.
There were multiple taxes in multiple jurisdictions and regular consumers almost had no idea how much tax on a commodity or service he/she was paying.
All that changed with the introduction of GST. This rolled out a clear cut tax structure with different slabs for different commodities and services depending on the price and social repercussions of such a tax.
Goods and Service Tax Act subsumed many taxes at the national as well as state-level which simplified the tax code. Taxes such as service tax, surcharges, state value-added tax, etc were subsumed under the GST. There have been many criticisms of the roll-out of the GST, but the advantages of the tax itself have outweighed such concerns. Some of the advantages of GST are listed below.
Simplification of the tax code
As mentioned earlier, the pre-GST tax structure of the country was an extremely bulky and convoluted one, there were multiple taxes at the state and national level which had to be computed.
Taxes such as state-level VAT as well as Central Excise duty, additional surcharges were required to be levied making the prices of products and services considerably higher than they are now (with some exceptions).
Many times, whenever a product entered by truck into a particular jurisdiction, they had to pay taxes as well as do a lot of paperwork to clear the cargo. This added to the cost of goods.
All of this has been simplified now with the implementation of the Goods and Service Tax. Now companies can file GST to the central authority and have their paperwork taken care of in a safe and transparent manner.
Under the previous tax regime, there was a cascading tax effect or what is known as double taxation. Many times, people had to pay a tax on top of a tax as there was no way of claiming input tax credits or a centrally managed tax system to keep track of how much tax was applied on a particular product throughout the manufacturing process. 9 The GST will simplify that structure and reduce the amount paid as there is a tax credit available to balance out any excess that was charged.
Ease of Doing Business
Having a convoluted and lengthy tax structure hampers business productivity as well as speed. A complex tax system requires a lot of paperwork and payments to various organizations that take up time and money. Goods and Service Tax Act has solved that due to having a central GST Council with streamlined processes
GST has provided a standardized and streamlined process for all businesses and cut red tape dramatically.
Increasing Tax Compliance
The Goods and Service Tax system has been designed keeping in mind tax compliance. The GST tax code provides for input tax credits along the value chain of a product, so that the tax is actually charged on the amount of value that has been created along the way on the product.
This system of input credit incentivizes businesses to keep a clear track record of their supply chain and financials to keep their costs down and take advantage of the input credit.
Increased Govt. Tax Collection
To run a massive tax collection system requires a lot of resources and people. The Pre-GST system had a myriad of taxes and required a lot of people to implement. The GST system has simplified that and along with increased tax compliance, has potentially increased the amount of money the govt is able to collect.
The more money that is raised due to increased compliance and less money spent on tax collection could be used for social programs to help those in need and increase the size of the economy with the added spending power.
An incentive for Foreign Companies
Having a transparent tax code is a huge requirement for foreign investment. As India has lofty goals to achieve a $5 trillion economy in the future, attracting high-quality foreign capital is a priority. Foreign investors are reassured by the transparency and ease of doing business that GST has brought.
This has led to India’s competitiveness to increase and India has moved up the ease of doing business rankings charts in recent years.
Benefits the consumer
A huge benefit that is rarely spoken about is the benefit that GST has brought to the consumer economy. Not only has GST reduced rates on certain items that are critical to the consumer economy, but it has also simplified the tax structure so that there is transparency for the consumer when purchasing a product or service.
One sector where the reduction in taxes has seen a huge impact is the food and beverage industry (non-alcoholic beverages). Before the introduction of the GST, the taxes on eating out were astronomically high, and on top of that, there were a lot of problems with the charges which were levied.
There was a service component in the tax which was calculated on a part of the bill when someone ate at a restaurant. This caused a lot of problems as restaurants were not calculating the service component of the bill properly and overcharging their customers. With the advent of GST, the rate was reduced to a fixed 5% of the total bill. This reduced the cost of eating out and made the restaurant industry fare better while allowing consumers to enjoy their meals at a much lesser cost than before.
Overall a simple tax code is enormously beneficial for the country, and sustaining growth for the Indian economy. This overhaul of the taxation system was long overdue. Its implementation has had problems like hasty policy changes and taxation brackets being changed due to policy implications, but overall after the initial tweaks, the system seems to be getting back on track.