GST replaced a complex web of indirect taxes such as excise duty, service tax and VAT which varied from state to state. GST was implemented to create a uniform tax structure and simplify India's tax system.
The Goods and Services Tax (GST) is a comprehensive indirect tax implemented in India on the 1st of July 2017. GST is considered one of India's most significant tax reforms and has impacted the Indian economy. This topic explores the effect of GST on the Indian economy, its impact on various sectors and the challenges and opportunities created by this new tax regime.
Did you know? The highest GST rate in India is 28%, the second highest among 115 countries that follow the GST system.
What is GST?
GST is a value-added tax levied on manufacturing or selling goods and services. GST is a destination-based tax that allows a continuous flow of input tax credits such that only the final consumer bears GST. There is no cascading of taxes since only the value added at each stage of the supply chain is taxed under GST.
Types of GST
GST is levied on the "supply" of goods or services or both, subject to certain exceptions. India has adopted the “Dual GST model” because of its federal structure. Thus, the tax is imposed simultaneously by both the Central and State governments. GST in India comprises of:
1. CGST (Central Goods and Services Tax)
The Central Government levies and collects it on intra-state supplies. CGST has been tax levied by the central government on the intra-state supply of goods and services.
2. SGST (State Goods and Services Tax)
State Goods and Services Tax (SGST) is the tax levied by the state government on the same.
3. UTGST (Union Territory Goods and Services Tax)
It is levied and collected by the Union Territory without intra-state supply legislation. UTGST is governed by the Union Territory Goods and Services Tax Act, 2017, which provides for the levy and collection of the tax.
4. IGST (Integrated Goods and Services Tax)
The Central Government levies and collects taxes on inter-state supplies. The tax is calculated based on the value of the goods or services supplied and the applicable tax rate.
Also Read: All You Need to Know About the GST Bill
Positive Effects of GST on the Indian Economy
Taxes help us create uniform tax structures across the country, reducing the cascading effect of taxes on the supply of goods and services across state borders.
1. Simplification of the Tax System
One of the primary goals of GST implementation was to create a uniform tax structure and remove economic barriers. This paved the way for an integrated economy. “One nation, one market, one tax” was GST's motto. It has made the indirect tax system more transparent, reducing multiple taxes and compliances.
2. Reduction in Tax Evasion
GST prevents tax cascading by providing a seamless flow of input tax credits across the supply chain. This has reduced tax evasion as businessmen can no longer avoid or claim credits based on fake invoices.
3. Reduction in Compliance Cost
As GST subsums numerous indirect taxes, compliance costs are reduced by eliminating multiple record keeping. This has made the process simpler and reduced associated complexities and resources.
4. Increase in Tax Revenue
GST is a comprehensive tax that covers the entire value chain by collecting tax on value-added at each stage. As a result, the tax base has broadened, increasing tax revenue for the Government. January 2023 GST collection amounted to nearly 1.5 lakh crores.
5. Promoting the “Make in India” Initiative
GST significantly boosts the “Make in India” campaign by reducing production costs and rendering Indian products competitive in global markets. This would make India a manufacturing hub and boost Indian economy's growth.
6. Increased Export
Due to GST's various benefits, production costs have been reduced dramatically. Exporters could lower their prices and increase competitiveness on the global market.
Adverse Effects of GST on the Indian Economy
GST has various benefits for the Indian economy but has some challenges and negative impacts.
1. Regressive Tax System
The GST system is designed so the ultimate tax burden falls on the final consumer. Also, it is a regressive tax, just like other indirect taxes. The tax on any product or service is the same regardless of whether the consumer is wealthy, middle class or poor.
Indian population is mainly middle-class or poor people, and hence GST negatively affects those people and the economy as a whole.
2. The Burden on Small Businesses
Earlier, small businesses like MSMEs were required to be registered and pay indirect tax only if their annual turnover exceeded 1.5 crores.
However, under GST, the threshold limit for registration is 20 lakhs (40 lakhs in goods only). Though there is an option to pay a 1% tax under the composition scheme for turnover up to 1 crore, it must forgo the input tax credit.
Impact of GST on Various Sectors
A lot of small businesses fall under the scope of GST and need help complying and adapting to it.
1. Telecom Sector
GST has increased the telecom sector tax rate from 15% (earlier regime) to 18%, increasing its financial burden. Also, the telecom sector relies heavily on diesel. But since diesel is out of GST scope, the telecom sector is deprived of ITC.
2. Logistics Sector
The logistics sector comprises many unorganised players who evade taxes, slowing down its growth. But GST has changed this sector. By introducing the concept of an E-way bill, logistics costs have decreased dramatically, leading to easy tracking of unorganised players, thereby eliminating tax evasion.
3. Automobile Sector
The implementation of GST has benefitted the automobile sector by reducing tax rates from 30-47% to 20-22%. It has also reduced transit time as check posts are cleared beforehand with the introduction of the E-way bill.
4. FMCG Sector
After GST implementation, this sector has witnessed huge growth due to the rapid adoption of e-commerce. It has also witnessed increased market competitiveness due to tax reductions. Distribution costs have been reduced due to seamless ITC flow.
5. Textile Sector
The Indian textile sector, one of the largest employment providers, contributes about 10% of exports. Thus after the implementation of GST, the export value has increased more due to the reduction in manufacturing costs and refund of ITC allowed to exporters.
6. Banking and Finance Sector
Service sectors like banking and finance paid 14% tax earlier, which has now increased to 18%.
7. Real Estate Sector
Real estate is the second largest employment generator, contributing around 7.6% to India’s GDP. The major highlight of GST for the real estate sector is the availability of a seamless flow of input tax credits. This was not available under the erstwhile tax regime.
GST has had a significant impact on e-commerce. It has numerous benefits, like reduced logistics costs and a simplified tax structure. Some small businesses have had difficulty adapting and surviving due to the new compliance mechanisms, such as TCS. The 2023 budget proposes to remove the restriction on certain e-commerce suppliers to avail of the composition scheme.
Budget 2023 - GST Updates
Following are the changes in GST Law as proposed by the Finance Bill, 2023
- It eliminates the restriction on certain e-commerce suppliers to avail of the composition scheme. Thus, suppliers of goods through ECO will now be eligible to opt for the composition scheme.
- ITC is now blocked in respect of CSR (Corporate Social Responsibility) expenses incurred by the assessee as per the requirement of the Companies Act 2013.
- Persons required to take compulsory registration as per section 24 need not take such registration if they are not liable for registration or exempted u/s 23(1).
- If the refund is delayed beyond a period of 60 days, then interest shall be payable on such refund from the date of application till the date of refund.
- The retrospective amendment has been made w.e.f. 01/07/2017 states that the following Schedule III activities should not be treated as exempt supplies.
- High sea sale
- Supply of warehouse goods before they are cleared for home consumption
- Supply of goods from one non-taxable territory to another non-taxable territory
- Compounding of offence provision is not applicable in case of the issue of invoice without supply.
GST has significantly impacted the Indian economy since its implementation. Its simplified structure and reduced cascading of taxes improved the ease of doing business in India.
However, there were also particular challenges, such as delayed refunds, high taxes on specific products and compliance burdens for small businesses. Despite these challenges, it has contributed significantly to the country’s economic growth.
Further changes and refining will boost the Indian economy in the long run.
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