The impact of GST on Indian economy will usher in a new era in financial growth. The launch of GST a game changer can prove to be a revolutionary one. Let’s check out the nuances of the new Goods and Service Tax and how it can revamp the Indian economy.
The Cascading Effect of GST
So how is the new GST different from the present taxation scenario?
- Eliminating tax on tax
I’ll explain this better with an example. Suppose X is selling his goods to Y. X charges a sales tax on the price. Y then sells the same goods to Z. Y also charges sales tax, but while calculating the sales tax, he has included the sales tax that he paid to X in the earlier purchase. This ends up in tax made on tax.
Introduction of VAT
This was the taxation scenario a few years back. Then came VAT, which reduced the cascading effect to some extent.
But the problem continued with VAT, as it was calculated based on a value including the excise duty, which still meant that it was a tax on tax.
VAT vs GST
When we already have VAT, why the need for GST?
- VAT rates are different for different states.
- Some states tend to undercut the rates to get more investors.
- It results in revenue loss for states and the Centre.
- GST offers a more uniform taxation system for all states and for all sectors.
- The taxes are suitably divided between the Centre and the State in case of GST.
- GST also makes it easier to offer goods or services all over the country in a uniform manner. This is because there is no additional tax to be paid in the different states.
GST to the Rescue
GST will solve the problem of tax on tax. In India, it is a dual model, being administered by the Central government as well as the State governments. It will incorporate all taxes like:
- Service tax
- Central Excise
- CVD under Customs
- SAD under Customs
Projected Benefits of GST
- Free flow of goods/services.
- Transformation of Indirect taxes that were bundled in the form of VAT, Service tax etc.
- Elimination of cascading effect that the earlier taxation system had.
- Simplified taxing policy when compared to the previous structure.
- The country becomes one single market.
- Goods/Services are taxed at one single rate, so there will be less disputes relation to taxes.
- Taxes on manufacturers are reduced. This improves their business. It makes manufacturers more competitive both at the national and the international level.
- The credit flow across the country is seamless, so evasion of tax is controlled.
- GST compliance is automated under the GST network.
Benefits for Consumer
Will you get goods or services at cheaper rate due to the introduction of GST? Remains to be seen and probably not!! That’s the reason why the Opposition is attacking the new GST taxation system.
In fact, it is possible that the prices will rise for the consumer. This is because the tax is now distributed over the whole supply chain, but the present tax revenue has to be maintained.
However, the government claims that there will be several tax cuts in different brackets. The tax regime will be simpler and the overall burden on goods will reduce.
Initial Hurdles for GST
- It could initially result in high inflation.
- Administrative costs could increase.
- There will be stiff opposition made by the states, as they lose their autonomy.
- Service tax will increase.
- Retail taxes will double.
- The taxes on imported good will increase by 6%.
- Compliance costs will rise, as the control over businesses is dual, both State and Central government.
- Small businesses will find it tough to use the new GST taxations system, as credit can only be obtained by connecting with the GST network.
- States will not be able to change tax rates independently.
- Manufacturing states might experience loss of revenue.
GST a Game Changer
- GST is not merely a change in the taxation system. It will have a multifaceted effect on businesses.
- Restructuring taxation. Most businesses incur indirect taxes. Initially, it will affect the supply chain, finance, taxation and prices.
- It will not just restructure the taxation system in India, but will impact the way in which businesses function in the country.
- It will influence major businesses and is a game changer. Business logistics will be revamped. Warehouses might be completely eliminated and goods will be supplied directly to wholesalers.
- Productivity will be enhanced and so will efficiency, as the market is unified enabling smooth goods flow in the country. Transport hassles will be reduced with reduced check points at borders.
Long Term Benefits of GST
There may not be too many short-term benefits for the economy with the advent of the new taxations system. However, as a long-term strategy, it just could work.
- The output will be higher.
- Employment opportunities will increase.
- There will be more economic inclusion.
Cutting Into the Darkness – Economic Information
You now see that GST can shake up the economy in different ways. One important aspect is that it will provide more economic information. If even one supplier in the chain does not enter the invoice information in the GSTN, every one else on the chain will be in the doghouse. So, all the partners of a supply chain are in the black or they are not. The gray economy will vanish.
The GDP data of the country will be able to fully capture the business sector. It will capture 100% of the economy, making it easy to know the GDP size, the growth rate, job creation rates.
This is because all transactions, both in the organized and the unorganized sector, including B2B transactions will have an online record. Indians can finally know the true state of their economy.
This is the pièce de résistance of GST and it will be a revolutionary one.