written by Khatabook | November 8, 2021

Effect of GST on the Indian Economy

Goods and Services Tax or GST was introduced in India in 2017 with the idea of one tax for the whole nation. Hence, it is considered one of the greatest tax reforms that India has ever seen. Several taxes were subsumed in GST, which led to the removal of the cascading effect of taxes. To comprehend the effect of GST on Indian Economy as a whole, we must first comprehend what GST is and how it is applied. We'll also go through in detail how GST affects different sectors.

What is GST?

The Goods and Services Tax (GST) is imposed on the country's manufacture and sale of goods and services. Every step of the production process is subject to taxation. The buyer and the manufacturer are both subject to the GST.  In other words, GST will be collected at the point of consumption. As a result, if a product is made in Haryana and sold in Delhi, the tax will be imposed in Delhi. Furthermore, GST is collected at every point in the production process when added value is included. 

Types of GST

In India, GST is levied at every stage of the manufacture and selling of products and services. When goods or services are consumed, this tax is imposed. The following are the several types of GST:

  1. CGST (Central Goods and Services Tax): The central government collects the CGST on intrastate sales of goods and services.
  2. SGST (State Goods and Services Tax): This tax is levied by the state government on the intrastate supply of goods and services.
  3. IGST (Integrated Goods and Services Tax): The IGST tax levies on exchanging goods and services between two states. The federal and state governments split the tax revenue.

Implementation of GST

GST has been implemented across the country in 29 states and 7 union territories to create a win-win situation for everybody. Fewer tax filings, specific regulations, and simple bookkeeping would help manufacturers and merchants; consumers would pay less for products and services. The government would earn more revenue by plugging revenue leaks. As we all know, ground realities differ. So, what is the impact of GST in India

Immediate GST Effect on Economy

  • Simplified Tax Structure

The country's tax structure has been streamlined due to GST. Since GST is a single tax, calculating taxes at various supply chain points has become more straightforward. Therefore, GST impact on India can be considered positive. Customers and manufacturers can both see how much tax they'll be charged and how it'll be calculated this way. It is also possible to avoid the difficulties of dealing with tax officers and authorities.

  • Support for SMEs

Small and medium-sized businesses can now register under the GST Composition Scheme. They pay taxes based on their annual revenue under this arrangement. As a result, firms with annual revenue of Rs. 1.5 crores are only needed to pay 1% GST. Other businesses with a turnover of Rs. 50 lakh are also required to pay GST at a rate of 6%.

  • Additional funding for production

The reduction in the overall taxable amount is another effect of GST on Indian economy. This money saved may be re-invested in the manufacturing process to boost output.

  • Elimination of cascading effect of taxes

The state and central governments' taxes have been combined under GST. This has eliminated the tax cascade effect, lowering the burden on both the buyer and the seller. So, even though it appears like you are paying a large amount of tax, you are paying fewer hidden taxes.

  • Improved operations across India

Tax barriers such as toll plazas and checkpoints can now be avoided. Previously, this caused issues, such as harm to unpreserved items during transportation. As a result, producers had to maintain buffer stock on hand to compensate for the losses. Their profit was limited by the overhead expenditures of storage and warehousing. These issues have been mitigated by a unified taxing system catering to the positive impact of GST. They may now readily move their wares throughout India. As a result, their operations across India have improved.

  • Increasing output

The overall tax component is about 30% of the product cost, according to the Indian retail industry. Taxes have decreased due to GST effects in India. As a result, the final customer pays lower taxes. The reduction in tax burden has boosted retail and other businesses' output and growth.

  • Increase in exports 

The customs charge on products exported has been decreased. The GST impact in India has resulted in the reduction of the cost of production in local markets. All of these reasons have boosted the country's export rate. When it comes to developing their companies worldwide, firms have grown more competitive.

The introduction of GST has aided in the consolidation of state and federal taxes. The cascading effect of numerous taxes has been reduced as a result of this. As a result, the tax burden on businesses and consumers has decreased. Also, the number of taxpayers has grown, resulting in a considerable increase in tax income. The whole tax system is now simpler to administer. Furthermore, small and medium-sized firms can expand their operations. It is believed that the positive impact of GST would assist more Indian businesses in entering overseas markets.

Also Read: History of GST in India - Benefits of GST Implementation

GST Bill Impact: Effect on small scale producers and traders

Consumers would now have to pay a higher tax on most of the goods and services they purchase. The bulk of everyday commodities are now taxed at the same rate or slightly higher. Furthermore, there is a cost of compliance associated with the GST adoption. This cost of compliance appears to be exorbitant and expensive for small-scale producers and traders, who have also expressed their opposition. They could end up having to charge more for their goods.

What is the effect of GST on consumer?

  • Consumers will now have to  pay higher taxes on products and services they purchase, based on the short-term effects. 
  • The bulk of necessary consumables will be taxed at the same rate or a higher rate. The benefits or positive impact of GST on the average person are numerous.
  • Small-scale businesses must also pay the expense of compliance, which may result in higher costs for their goods, impacting consumers.
  • GST effects in India have several long-term advantages. With the reduction in due taxes for consumer goods makers such as Fast-moving consumer goods or FMCG, the automobile industry will be forced to lower the pricing of its products. The clients will be able to pay less when attempting to obtain these services due to this.
  • A reduction in pricing will instantly increase demand, accelerating the production cycle and increasing profitability. Both the buyer and the seller will eventually save money, and the economy will benefit as well.
  • A jump in output will also create the path for growth, which will result in more jobs and more revenue catering to the GST impacts. This not only expands opportunities for the average person but also helps the economy.
  • The introduction of GST necessitates the creation of an invoice for the purchase of any goods or services. 
  • The possibility of black money and corruption will be reduced with a good billing system. For an     average person in India, these have been troublesome elements.

Impact of GST on Different Sectors

  • Pharma

With its streamlined tax structure, the pharmaceutical and healthcare industries would benefit from the impact of GST in India. It will also receive a tax break in exchange for making healthcare more affordable and accessible to individuals of all economic levels.

  • E-commerce

E-commerce has a lot of room for expansion such as it benefits the supply chain process of goods production by reducing the tax rate. E-commerce businesses, on the other hand, would have to deal with the GST tax collected at the source element.

  • Telecom Sector

Prices in the telecom sector are projected to fall as storage, shipping, and other expenses decrease.

  • Logistics

Logistics plays a critical role in the economy of a large country like ours. A well-organised and structured logistics business, particularly under the Make in India banner, has the potential to develop enormously.

  • Fast-moving consumer goods or FMCG

FMCG companies would save a lot of money on logistics and distribution since GST will eliminate several sales depots.

  • Farming and Agriculture

Agriculture contributes the most to India's GDP, accounting for more than 18%. Transportation expenses for agricultural goods will also decrease as logistics become more efficient. As a result, the impact of GST can be observed to be positive on wholesalers.

  • Startups

GST has benefited Indian entrepreneurs greatly, with features such as a Do-It-Yourself compliance approach, higher registration limits, free movement of products and services, and tax credit on purchases. It has also gotten easier for firms with a pan-India presence, particularly those in the e-commerce sector, to compute taxes. If you work in small-scale industry, you should be aware of the impact of GST on Indian economy.

  • Automobile

Several taxes were applied under the old taxation system, including excise, VAT, sales tax, road tax, motor vehicle tax, and registration duty, which GST has now replaced. Automobile costs are expected to fall, leading to an increase in sales and profitability.

  • Textiles Sector

Textiles are one of the major employers of both skilled and unskilled labour in India. With the elimination of customs charges, the textile sector in India, which accounts for 10% of total exports, is expected to grow. Cotton, a commodity on which most small-scale textile companies rely, would be positively impacted by GST. These are some of the impacts of GST on small businesses.

  • Individuals who work for themselves

Self-employment or freelancing is a relatively new business in our nation. Still, with the adoption of the GST, it has become easier to file taxes because they fall under the category of service providers. Such individuals must understand how GST would impact their buisness and follow the rules and regulations under GST.

GST impact on India: What Does the Future Hold?

When it comes to the long-term benefits, it is expected that GST would result in lower tax rates and tax slabs. Only two or three rates are used in countries where the Goods and Service Tax has assisted in economic transformation: a mean rate, a lower rate for essential products, and a higher tax rate for luxury goods.

In India, we now have five slabs with three rates: an integrated rate, a central rate, and a state rate. In addition to this, there is a cess fee. For fear of losing revenue, the government has refrained from experimenting with lower or cheaper charges. GST and its impact on Indian economy are expected to provide significant benefits in the long run. The inflation would also be decreased due to GST as there will be no tax on tax.

It will increase the government's revenue and bring in more Foreign Direct Investment into India. GST will lead to ease of doing business in India.

Also Read: Differences between GST and Previous Tax Structure

Conclusion

GST is one of the biggest tax reforms in the history of India. GST has several advantages and disadvantages that influence both consumers and sellers. It will lead to ease of doing business in India, reduced inflation, and an increase in Foreign Direct Investment into India. The impact of GST on GDP is negative since it increases the inflation rate because the tax rate has increased the cost of some products and services such as pharma products, telecom, dairy, etc. These aspects also must be considered. On the one hand, as taxes have grown more simple, compliance costs have increased. Thus, the impact of GST on Indian Economy must be carefully analysed. Both positive and negative aspects should be considered while evaluating GST impact in India.

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FAQs

Q: What are some of the advantages of GST?

Ans:

Some of the advantages of GST are simplified tax structure, elimination of cascading effect of taxes, increase in revenue, and more funds for production, etc.

Q: What is the rate of GST in India?

Ans:

Nearly all products and services in India are subject to GST, which is split into four rates: 5%, 12%, 18%, and 28%.

Q: What is the impact of GST in India on a common person?

Ans:

Due to many levels of taxes and cess under the previous tax structure, the average man was paying tax on tax. However, because of the unified GST, a lower tax burden will be imposed on products and services, and prices would be decreased, benefiting the ultimate consumer.

Q: Who is the GST chairman?

Ans:

The Union Finance Minister is the chairman of GST.

Q: What are the disadvantages of GST?

Ans:

The tax rates of many items have been raised, resulting in higher costs. Textiles, media, pharmaceuticals, dairy products, information technology, and telecommunications are among the industries that have suffered from the increased tax.

Q: What are the three types of GST?

Ans:

The three types of GST are Central GST (CGST), State GST (SGST), and the Integrated GST (IGST)

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