India is ever-evolving and reaching potential milestones with many schemes like ‘Digital India Campaign’, ‘Make in India Initiative’, etc. Implementing the Goods and Services Tax (GST) is boosting the ‘Make in India’ campaign and leading to the growth of GDP and a decrease in unemployment rates. The earlier indirect tax regime created multiple tax spheres at both centre and state levels, which contributed to increased confusion and decreased tax compliance. This is the main reason which was hindering the trade economy and adversely affecting the Indian economy as a whole. Here is where the GST becomes the need of the hour and the most required scheme in India.
After many years of effort and planning, GST was finally enforced in India, effective from 1st July 2017. This is one of the biggest milestones India has ever achieved by successfully revamping the economy’s indirect tax structure. Under the ‘One Nation, One Tax’ initiative, GST became the single indirect tax by absorbing repetitive indirect charges like sales tax, VAT, excise duty, service tax, entry tax, countervailing duties, octroi, and more.
GST is a destination-based tax benefiting the economy in many ways, and here you can find the various advantages of GST in India that are explained in detail. Continue reading to learn about GST benefits with examples.
Did you know? Assam was the first ever state to enforce GST in India, and 160 plus countries across the globe have already implemented the GST scheme.
What are the Advantages of GST?
GST is a revolutionary machine that is becoming a popular indirect tax regime followed by many countries, including India. It is known for its simplicity and uniformity. The pre-GST era created multiple tax spheres, multiple compliances and check posts which were wiped out by the introduction of the GST scheme. The post-GST era boasts a unified tax system with easy compliance that benefits taxpayers and various businesses.
Here, let's look into an array of GST benefits classified into three categories for better understanding. Read on to learn about the advantages of GST in India for the economy, businesses, and consumers.
Advantages of GST for the Economy
Increased Uniformity and Better Tax Administration
GST scheme is a robust system backed by end-to-end IT systems and official functional websites like Goods and Services Tax Council and Goods and Services Tax Network. With the introduction of GST, the Indian economy became the ‘One Nation, One Tax’. This improved the uniformity of indirect tax structure in the economy, thereby giving a boost to FDIs and international trade. As GST is the single tax, it is now easier to administer and improve by both the central and state governments.
Greater Control on Tax Leakages and Tax Evasion
As already mentioned, the previous indirect tax structure resulted in fewer tax compliances by the taxpayers and increased confusion regarding the ratio of contribution of different indirect taxes. GST is the game-changer which is designed in a way that increases tax compliance by various businesses and traders. It has in-built seamless Input Tax Credit (ITC) mechanism, which allows the smooth movement of goods in the supply chain. This results in improved tax compliance, thereby curbing tax leakages and tax evasion.
Improved Transparency and Revenue
GST is a simple structured tax mechanism which is the only tax that flows in the supply chain thereby eliminating all the unnecessary and repetitive taxes. This makes GST a transparent tax which increases tax compliance resulting in higher indirect tax revenue for both central and state governments. It is also estimated that GST results in the overall GDP growth of the economy and a decrease in the tax collection costs for the government.
Significant Economic Growth
The vital advantage of GST is that it contributes to the overall economic growth through:
- Boosting exports and trade industry
- Global exposure through international trade and foreign investments
- Increasing employment opportunities
- Unification of indirect tax laws and rates between centre and states
- Minimal GST returns and common compliance procedures
- Seamless ITC mechanism and refund of taxes
- Common system of goods and services classification
- Eradication of poverty for the public welfare
Advantages of GST for the Trade and Businesses
Improved Business Efficiency
With this unified tax structure, unnecessary taxes and different tax compliances for various indirect taxes, have been removed and have brought better ease of doing business. GST compliance is made simple and uniform for various businesses and traders with a strong IT infrastructure. Now businesses and various taxpayers can avail of an array of services from the online GST portal such as GST registration, tax payments, filing of GST returns, obtaining GST refunds, filing complaints, solving GST queries, and more. This makes the whole process transparent and easy to comply thereby increasing business efficiency.
Elimination of Cascading Effect of Taxes
The pre-GST period involved repetitive taxes on goods at every stage of production, which resulted in double taxation. Here, the various taxes at both centre and state levels are levied on the same supply chain multiple times, which increased the value of indirect taxes. This ultimately increased price of goods and services, thereby being an unnecessary burden to the final consumer. GST changes this whole game by providing relief to the final consumer through tax credits like ITC throughout the supply chain on both intra-state and inter-state supplies. Now, businesses can sell their products at lower costs due to the decrease in double taxation.
Availability of ITC Tax Credit
Unlike the previous indirect tax system, where there was no availability of tax credits whatsoever, the GST brings a seamless Input Tax Credit mechanism where suppliers can claim ITC on the outward supply of goods.
For example, Mr X purchased goods worth ₹1000 and 9% tax is paid, which comes to ₹90. The same goods are sold at the sale price of ₹2000 with the collection of GST from a customer at the rate of 12%, which comes to ₹240. Here, under the previous tax regime, the supplier has to pay the total indirect tax of ₹240 irrespective of the fact that the supplier already paid ₹90 on the purchase of goods which results in cascading effect of taxes. This is all because of the absence of tax credits in the pre-GST era. Now, under ITC, the supplier can set off ₹240 with ₹90 and pay the net GST liability of ₹150. However, one has to note that ITC has certain conditions, exemptions, restrictions, etc, that one has to follow to obtain the input tax credits.
As the major central and state taxes like CST, VAT, service tax, and more are completely absorbed into GST, the final manufacturing cost of ‘Make in India’ products will be lower and economical. This makes Indian products competitive in the international trade market thereby increasing the demand for Indian exports. The tax burden on final goods and services will be low, leading to increased consumption and production of goods. This has a positive impact on exports, manufacturing industries and local businesses.
Advantages of GST for the Consumers
Low Prices of Goods and Services
With the availability of ITC and the levy of single tax – GST, the overall costs of goods and services will be lower. Also, the unnecessary burden of various indirect taxes will be eliminated which results in increased consumption by customers.
Increased Compliance Due to No Hidden Costs
Earlier indirect tax regimes brought lots of confusion regarding the proportion of a multitude of taxes. No one including retailers, service providers, or consumers could figure out the ratio of each tax they are paying to the government. This resulted in decreased tax compliance as there is no way to realise the contribution to society and public welfare.
GST is designed in a simple and transparent way which does not include any hidden costs. This is the only tax that flows across the supply chain. Now the final consumer can figure out the percentage and ratio of GST they are paying to the government which results in increased tax compliance. This also positively impacts becoming a responsible citizen and contributing to the economy's welfare.
Encouragement to Local MSME Businesses
As the GST is attracted to businesses having turnover of more than the prescribed limit, such as ₹10 lakhs, ₹20 lakhs, or ₹40 lakhs, as the case may be, most small businesses and local retailers are exempted from GST. This makes the small businesses promote their goods and services at lower costs attracting consumers from various segments.
Also read: Inspection, Search and Seizure Under GST
Although the introduction of GST resulted in disruption of business and change in business software, it positively impacts the economy in the long run. The classification of benefits of GST into three categories: for the economy, businesses and consumers will bring an in-depth understanding of the advantages of GST in India.
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