In the chronicles of India’s economic history, there exists a chapter of transformation that began in 2017. It’s a story of a tax revolution, a monumental shift that sent ripples through the nation’s financial landscape. This revolution is none other than the introduction of the Goods and Services Tax, or simply GST. This gave rise to the hot topic i.e. the impact of GST on Indian economy!
Like a phoenix rising from the ashes of an antiquated tax system, GST emerged as a game-changer. How? By promising to reshape the way businesses functioned and the way we paid our taxes. But what exactly is the impact of GST in India?
Join us on this journey as we unravel the intricate web of changes that GST has woven into the fabric of India’s economy!
(A) What is GST?
GST refers to Goods and Services Tax. It is a unified indirect tax system levied on the supply of goods and services in India. GST replaced multiple previous taxes to streamline and simplify taxation.
Let me explain the concept in simple terms!
Imagine you’re at a grand buffet, and you love trying different foods. Instead of paying separately for each dish, you pay just one fixed price to enjoy everything on the menu. That’s kind of how the Goods and Services Tax, or GST, works for India.
Before GST, there were lots of different taxes when you bought things or used services. It was like paying extra for every course at the buffet. It made things complicated for both businesses and customers.
But then, GST came along, and it said, “Let’s make it simple!” It combined all those separate taxes into one. So, whether you’re buying a phone, going to a restaurant, or booking a flight, you pay just one GST instead of a whole bunch of different taxes.
This change was like a breath of fresh air for businesses. They didn’t have to deal with a ton of different tax rules anymore. It’s like switching from a messy jigsaw puzzle to a straightforward Lego set.
GST has made India’s tax system smoother and less confusing. So now, when you pay for things, you’re paying one tax instead of a confusing mix of taxes, and that’s the magic of GST!
(B) Key Features of GST
The key features of GST are described in the following table-
|Features of GST||Description|
|Unified Tax System||Replaces multiple indirect taxes with one system.|
|Dual Structure||Combines central and state components.|
|Destination-based tax collection||Tax collected where consumed, not produced.|
|Comprehensive||Applies to goods and services across the supply chain.|
|Input Tax Credit||Allows offset of input tax against GST liability.|
|Threshold Limits||Exemptions or lower rates for small businesses.|
|Multiple Rates||Different rates for goods and services.|
|Electronic Filing||Mandates electronic returns and payments.|
|Compliance Ratings||Rates businesses based on tax rule adherence.|
|Anti-Profiteering||Ensures rate reductions benefit consumers.|
|Real-Time Tracking||Monitors transactions for reduced tax evasion.|
|GST Network (GSTN)||Provides a common portal for tax compliance.|
|Simplified Returns||Reduces return complexity for businesses.|
|Transparency||Offers access to compliance history and ratings.|
(C) Who Introduced GST in India?
Our former finance minister P. Chidambaram introduced GST in India. Well, that was a long journey.
Imagine you’re putting together a big puzzle called “Simplifying Taxes” in India. This puzzle had lots of pieces, each representing different taxes like the Value Added Tax (VAT), excise duty, service tax, and more. It was a confusing puzzle!
Then, the Union Finance Minister of that time stepped in. His name was P. Chidambaram. He had a brilliant idea and shared it during his budget speech for the year 2006-07. He said, “Let’s make things simpler and bring all these puzzle pieces together under one name: Goods and Services Tax i.e., GST.
But it took some time to turn this idea into reality. It was like waiting for the climax of a thriller movie. Finally, on March 29, 2017, both houses of the Indian Parliament said, “Yes!” to GST.
Thus, from July 1, 2017, onwards, GST is applied to various goods and services of India. Since then, GST has been making life easier for businesses and people all over India.
(D) GST Rates for Different Sectors
The GST rates in India for different types of goods and services are divided into four slabs: 5%, 12%, 18% and 28%. Some goods and services are also exempt from GST or have a lower or higher rate of GST.
Look at the following table to understand the GST rates for different sectors–
|Agriculture||Dried leguminous vegetables, |
shelled, whether or not skinned
or split pre-packaged and labeled
|Dairy||Milk, curd, lassi, buttermilk||0%|
|Food||Frozen meat products, |
cheese, ghee, butter, dry fruits
in packaged form, animal fat,
sausage, fruit juices, nankeen,
ketchup & sauces
|Flavored refined sugar, pasta, |
cornflakes, pastries and
cakes, preserved vegetables,
jams, sauces, soups, ice cream,
instant food mixes, mineral water
|Molasses, chewing gum/bubble |
gum, and white chocolate
|Textile||Silk and jute fibers||0%|
|Cotton and natural fibers||5%|
|Man-made fibres and filament yarns||18%|
|Apparel below Rs.1000 per piece||5%|
|Apparel above Rs.1000 per piece||12%|
So, are these GST rates on various sectors beneficial for us? Yes! Of course. But how? You may wonder. Go through the next section to dive deeper!
(E) Advantages and Positive Impact of GST on Indian Economy
Let’s look at the positive impact of GST on Indian Economy-
(E.1) Simplified Tax System
As you’ve read in the introductory para, before GST the scenario in the goods and services market was quite complicated. You had to pay a different tax every time you bought something or used a service. It was like playing a game with too many rules. But with GST, they made it simpler. You pay just one tax for almost everything you buy or use. It’s like using a single key to unlock many doors.
This streamlined tax structure has reduced compliance costs for businesses and made it easier to conduct interstate trade. This was the strongest impact of GST on Indian economy.
(E.2) Boosting Businesses and GDP Growth
The implementation of GST has contributed to India’s GDP growth by increasing tax revenue and improving tax compliance. A more efficient tax collection system has helped the government invest in infrastructure and welfare programs.
(E.3) Reduced Tax Evasion
Tax evasion means some people don’t pay their taxes properly. It’s like playing hide and seek with the government. GST brought in better ways to track transactions. How? The GST regime includes a robust IT infrastructure for tax collection and monitoring. This has significantly reduced tax evasion by providing transparency and real-time tracking of transactions.
(E.4) Uniform Tax Rates
GST has introduced a uniform tax rate across the country for most goods and services. It promotes the ease of doing business and ensures a level playing field for businesses across states.
(E.5) E-Commerce Growth
The advent of GST in India triggered a significant boost in the e-commerce sector, revolutionizing the way online businesses operate across the nation. Before GST, e-commerce companies faced a complex web of tax regulations, differing from state to state. It was akin to navigating a maze filled with tax hurdles.
But with GST, a single, unified tax regime was introduced, making it much easier for these online businesses to comply with tax rules.
Imagine GST as a digital highway with consistent rules across all states. It streamlined tax compliance for e-commerce platforms, eliminating the need to calculate and adhere to multiple state-specific taxes. This simplification was akin to providing e-commerce businesses with a clear and efficient path, free from the obstacles that previously hindered their operations.
(E.6) Supply Chain Efficiency
GST didn’t just simplify taxes; it also revolutionized the way goods moved within the country. Before GST, goods had to pass through multiple checkpoints and tax barriers when crossing state borders. This process led to delays, increased transportation costs, and longer delivery times, much like a journey filled with unnecessary roadblocks.
Then, GST entered and these roadblocks were cleared away. The new tax system dismantled the barriers that once slowed down the movement of goods. It transformed the supply chain into a streamlined, efficient process.
Goods now move seamlessly from one state to another, reducing transportation costs and ensuring quicker deliveries. Think of it as a superhighway for goods, allowing them to reach their destinations faster and more cost-effectively. This was a significant impact of GST on Indian economy.
(E.7) Increased Formalization of the Economy
Before GST, many businesses in India operated in the shadows of the informal sector. They often avoided formal registration and taxation, leading to a lack of transparency and lost tax revenue for the government.
However, GST introduced a compelling incentive for these businesses to come out of the shadows and formalize their operations. This incentive came in the form of an “input tax credit.” Under GST, businesses could claim credit for the taxes they paid on their inputs, like raw materials and services.
To avail of this benefit, businesses needed to be part of the formal economy. This provided a strong push for previously informal businesses to register, declare their transactions, and become a part of the tax system.
That’s how GST brought sunlight to the previously shady corners of the economy. More businesses joined the formal sector, which not only increased transparency but also enhanced overall tax compliance.
Much like a coin revealing its two distinct sides, GST also harbors a shadowy aspect. What lies in the shadows? Dive into the next section to uncover the secrets.
(F) Disadvantages or Negative Impact of GST on Indian Economy
The negative impact of GST on Indian economy didn’t go unnoticed. The news channels were filled with the discussion on the loopholes of GST. So, let’s discuss some of the disadvantages of GST-
(F.1) Initial Transition Challenges
When GST was first introduced, there were teething problems and a steep learning curve for both businesses and consumers. Adapting to the new tax system was akin to navigating uncharted waters. Many businesses faced difficulties in understanding and implementing the new tax rules, and this initial period was marked by confusion and disruptions.
(F.2) Complex Compliance
While the aim of GST was to simplify the tax system, it introduced a multitude of tax rates, including 0%, 5%, 12%, 18%, and 28%. This complexity in tax rates and frequent changes in rates added a layer of intricacy to tax compliance. Small and medium-sized enterprises (SMEs) often struggle with the complex GST return filing process and compliance requirements.
(F.3) Impact on Small Businesses
GST has had a disproportionate impact on small businesses, particularly those with turnover below a certain threshold. The compliance costs associated with GST, including the need to maintain detailed records and file regular returns, can be a significant burden for these enterprises. This has raised concerns about the competitiveness and survival of small businesses.
(F.4) Inflationary Pressures
There were initial concerns that the introduction of GST might lead to inflation due to higher tax rates on some goods and services. While these concerns have largely subsided over time, fluctuations in tax rates can still influence consumer prices, impacting household budgets.
(F.5) Revenue Distribution Challenges
The distribution of GST revenue between the central and state governments has been a source of contention. States often rely heavily on GST revenue to fund their programs, and any delay or discrepancy in revenue sharing can strain the finances of individual states.
(F.6) Impact on Unorganized Sectors
Certain sectors, like the informal and unorganized segments of the economy, faced challenges in adapting to the formal GST framework. These sectors, which traditionally operated outside the tax net, experienced disruptions as they had to register under GST and comply with its provisions.
(F.7) Complex Rate Rationalization
The process of rate rationalization under GST has been gradual, leading to inconsistencies in tax rates across different product categories. The need for periodic rate revisions and adjustments has created uncertainty for businesses and consumers.
Note: GST is an indirect form of taxation that almost every citizen of India pays. But when it comes to direct taxes, only 5% of Indians pay taxes. Curious to know why? Go through the article “Why only 5% of Indians pay tax?” and you will find out the reasons soon!
(G) Final Words
GST has left an indelible mark on the Indian economy. It simplified taxation, streamlined supply chains, and incentivized formalization, fostering transparency. While challenges persisted during the transition, the long-term benefits have been significant. It spurred economic growth, enhanced tax compliance, and propelled India towards a unified market.
Nevertheless, ongoing efforts to address complexities and refine the system are imperative for its sustained success. The key takeaways underscore GST’s role as a transformative force, driving economic evolution and promoting a more efficient, business-friendly environment in India.