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Impact Of The Goods And Service Tax On The Indian Economy

Vrinda Mathur
May 02, 2023

GST, India's largest tax reform based on the concept of "one nation, one market, one tax," is finally here. The long-awaited moment for the Indian government has finally arrived. The single largest indirect tax regime has gone into effect, removing all inter-state trade barriers. With a single stroke, the GST implementation transformed India into a unified market of 1.3 billion citizens.

Fundamentally, the $2.4 trillion economy is attempting to transform itself by eliminating internal tariff barriers and combining central, state, and local taxes into a single GST. The rollout has reawakened hopes that India's fiscal reform program will regain momentum and broaden the economy.

The idea behind implementing GST across the country in 29 states and seven union territories is that it will benefit everyone. Manufacturers and traders would benefit from fewer tax filings, clear rules, and simple bookkeeping; consumers would pay less for goods and services; and the government would generate more revenue by plugging revenue leaks. As we all know, ground realities differ. So, how has GST affected India? Let us investigate.

What is GST?

GST stands for Goods and Services Tax, It is an indirect tax that replaced many previous indirect taxes, including the value-added tax, service tax, purchase tax, excise duty, and others. GST is a tax levied by India on the supply of specific goods and services. In India, there is only one type of tax.

GST stands for Goods and Services Tax. It is an indirect tax that has largely replaced many other indirect taxes in India, including excise duty, VAT, and services tax. The Goods and Services Tax Act was passed by Parliament on March 29, 2017, and went into effect on July 1, 2017.

In other words, the supply of goods and services is subject to the Goods and Services Tax (GST). The Goods and Services Tax Law in India is a multi-stage, destination-based tax levied on every value addition. GST is the country's single domestic indirect tax law. The Goods and Services Tax (GST) is an indirect tax, meaning that it is levied on the supply of goods and services and is eventually paid by the consumer.

The GST was implemented by the Indian government in 2017 as part of their "one nation, one tax" reform. It is a single tax imposed on the supply of goods and services from the manufacturer to the consumer, effectively replacing multiple indirect taxes. The main goal of the reform was to bring various types of taxes under the umbrella of a single tax system.

GST is a comprehensive, multi-stage, destination-based tax levied on all value additions in India. The GST council governs tax rates, rules, and regulations under the concept of one nation, one tax. The council is made up of finance ministers from both the federal and state governments. This means that taxation is now governed by both the Union and state governments via Central GST and State GST, respectively.

The Central GST (CGST) by the Central government and the State GST (SGST) by the state government are levied on intra-state transactions. The Central Government levies Integrated GST (IGST) on inter-state transactions and imported goods and services. This, however, complicates the tax collection process for state governments.

Also Read | Goods and Service Tax (GST) in India Explained

Types of GST

In India, GST has replaced several indirect taxes. On March 29, 2017, the Goods and Services Tax Act was passed by Parliament. The Act went into effect on July 1, 2017. Furthermore, GST tax is classified into four types, which are listed below:

Types of GST

SGST:

State Goods and Services Tax (SGST) is one of four classifications of Goods and Services Tax (CGST, IGST, and SGST) with the idea of one tax in one country. The State Goods and Services Tax Act of 2016 governs SGST. The current state taxes of State Sales Tax, Luxury Tax, Entertainment tax (unless it is levied by the local bodies), VAT, Taxes on the lottery, betting, and gambling, and Entry tax is not instead of Octroi, and state cesses are incorporated into the GST tax. It violates the CGST and IGST.

CGST:

The CGST stands for Central Goods and Services Tax. It is accountable to providers operating within the state. The accumulated expenses will be shared with the focal expert body. This implies that both the Central and State governments will agree to consolidate their levies to a suitable extent for income sharing. Section 8 of the GST Act states that charges are imposed on all intra-state supplies of products or potential benefits, but the rate of the expense will not exceed 14 percent, each.

IGST:

IGST (Integrated Goods and Services Tax), is one of three Goods and Services Tax (CGST, IGST, and SGST) categories with the concept of one tax, one nation. The IGST is governed by the Integrated Goods and Services Tax Act of 2016. When goods and services are moved from one state to the next, IGST is levied. IGST is collected on goods transported from Tamil Nadu to Kerala. The income from IGST is divided between the state and local governments at rates determined by specialists.

UGST:

The Union Territory Goods and Services Tax (UTGST) is levied on the supply of goods and services in any of the country's Union Territories, namely Andaman and Nicobar Islands, Daman and Diu, Dadra and Nagar Haveli, Lakshadweep, and Chandigarh. UTGST is levied in addition to CGST.

Also Read | What Digital Entrepreneurs Need To Know About GST

Impact of GST

It has been three years since the implementation of the Goods and Services Tax (GST), India's most significant tax reform, on July 1, 2017. The amount of changes and reforms implemented in the last three years has been a roller coaster ride for the government, industries, and consumers. These changes were primarily intended to rationalize rates, simplify procedures, and reduce tax evasion. The government also prioritized the stabilization of GSTN, one of the world's largest online tax systems.

Consumers would now have to pay more tax on the majority of the goods and services they consume. The majority of everyday consumables are now taxed at the same or slightly higher rate. Furthermore, the GST implementation comes with a compliance cost. This cost of compliance appears to be prohibitively high for small-scale manufacturers and traders, who have also protested against it. They may end up charging more for their goods.

In terms of long-term benefits, it is expected that GST will not only result in lower tax rates but also lower tax slabs. Countries where the Goods and Services Tax has aided in economic reform use only two or three rates: the mean rate, a lower rate for essential commodities, and a higher tax rate for luxurious commodities.

In India, we currently have 5 slabs with up to 3 rates - an integrated rate, a central rate, and a state rate. Cess is also levied in addition to these taxes. Fear of losing revenue has kept the government from experimenting with fewer or lower rates. This is unlikely to change anytime soon, though the government has stated that rates may be reconsidered once the RNR (revenue-neutral rate) is reached. In the medium term, the impact of GST on macroeconomic indicators is expected to be very positive. The cascading (tax on tax) effect of taxes would be eliminated, lowering inflation.

Let us examine the following statistics and key indicators to determine how successful this historical tax reform has been in achieving its goals:

Increase in the tax base:

Since the GST regime's implementation on July 1, 2017, over 38 lakh taxpayers have migrated into it. In September 2017, this figure had risen to more than 64 lacks. Furthermore, with the addition of over 58 lacks new GST registrations, this number has increased by nearly 90 percent, and we had a total (new plus migrated) of 1.23 crore active GST registrations as of 31 March 2020. This expansion indicates a significant increase in the tax base as well as a shift in taxpayer compliance behavior.

Revenue collections:

While the government collected INR 7.4 lakh crore in the first nine months of FY 18, the government collected INR 11.7 lakh crore in FY 19. On the other hand, due to rate reductions/rationalization across several products, collections during FY 20 were lower than expected and grew by 4% over FY 19 to reach INR 12.2 lakh crore.

Rationalization of interest rates:

The government maintained its emphasis on rationalizing GST rates. Although the overall rate structure remained unchanged, significant progress has been made in lowering GST rates for various products. On July 1, 2017, 19% of items were subject to the 28 percent GST rate bracket; currently, only 3% are subject to the 28 percent GST rate bracket. Approximately 50% of items are now subject to 18% GST, 21% are subject to 12% GST, and 25% are subject to 5% GST.

Clarifications and amendments to legislation:

The GST law has undergone significant changes since its inception on July 1, 2017. With nearly 700 notifications, 145 circulars, and over 30 orders, significant changes have been made to address taxpayer demand, simplify procedures, and reduce tax evasion.

Summing up

GST will primarily eliminate the cascading effect caused by the tax-on-tax regime on the sale of goods and services. The effect will have a direct impact on the cost of goods. It has reduced the cost of many items, including movie tickets, restaurant dining, television, washing machines, stoves, and many others. GST is a technologically driven tax because all activities such as registration, return filing, refund applications, and notice responses must be completed online through the GST portal. This expedites the process. It also has no hidden costs for registered retailers, lowering the cost of doing business.

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Impact Of The Goods And Service Tax On The Indian Economy

What is GST?

Types of GST

SGST:

CGST:

IGST:

UGST:

Impact of GST

Increase in the tax base:

Revenue collections:

Rationalization of interest rates:

Clarifications and amendments to legislation:

Summing up

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