We will highlight a new but very important topic in the taxation world : GST or Goods and Services Tax : Impact of GST on Indian economy through this blog.
GST, the biggest tax reform in India is going to be introduced, most probably from 1st July, 2017. All Indians must get ready to embrace and welcome this new tax reform. But, before that all should be aware about impact of GST on Indian Economy.
Once a new tax reform is introduced, it brings with it new implications and effects. Starting from individuals to small businesses as well as big companies also, nobody shall be left untouched by GST implications.
Among the economic crisis across the globe, India has marked himself a ray of hope with ambitious growth targets, supported by the missions like ‘Make in India’, ‘Digital India’, etc. GST is expected to provide the much needed economic growth by transforming the current indirect taxation to free flow of goods and services within the economy. It will also help to eliminate the cascading effect of tax on tax.
What is GST ?
Goods and Services Tax is an indirect tax applied both on goods and services at a uniform rate. This means goods and services will have uniform tax rate. GST will be applied to whole country as a single form of tax, replacing other indirect taxes like VAT, Service tax, CST, CAD,etc.
GST is an indirect tax to be applicable on all goods and services at a uniform rate in India. There are some products which are specifically exempted under the GST Law. The main motive of GST is to remove the cascading effect of taxes so that consumers will pay taxes at the final level of transactions and not at different levels. As GST is a destination based tax, it will be levied on buyers of goods, i.e where goods are consumed and where services are provided.
Final GST Slab rates :
Zero rated items : Food grains used by people . (Now we can have a sigh of relief….hmmm…)
5% Rate : Mass consuming items including essential commodities will have low tax incidence.
12% and 18% Rate : Two standard rates have been finalized as 12% and 18%
18% Rate : Particular white goods like Air conditioners, Washing machines, Refrigerators, Soaps and Shampoos, etc. that were taxed at 30-31%, shall now be taxed at 28%.
Some demerit goods like tobacco products, pan masala, aerated drinks and also luxury cars shall be charged at the highest rate of 28%. There shall be an additional cess on some luxury goods be imposed.
Those services that are now 15%, shall be taxed at a higher rate of GST @ 18%.
The tax rate on Gold is yet to be decided.
GST Impact on India :
Increased FDI: There may be an increase in Foreign Direct Investment once GST is implemented as the present complicated tax laws are one of the reasons foreign companies are not willing to come to India in addition to widely spread corruption.
Single Point Taxation: All tax laws will be uniform, that lead to single point taxation for supply of goods and services throughout India. This increases the tax compliance.
Growth in Overall Revenue: There is an estimation that India can get a revenue of $15 billon per annum by implementing GST as it is going to promote exports, raise employment and boost growth.
Simplified Tax Laws: This will reduce the litigation and waste of time of the judiciary. Present tax law appears to be much worse, as it is an amalgam of the bad parts of VAT/ST/CE.
Increase in Exports and Employment: GST can also show good result in increased employment, promotion of exports. This will have a significant boost to overall economic growth land labor, capital production factors.
As GST is new to India, so a lot of awareness needs to be created among the public. Various Tax Professionals has an important role of taking care of solving the queries of various sections of society.
GST might overburden the common man, as the current Service tax is 15%, but after implementation of GST, It is going to be 18%. So you can imagine, how hard it will hit our pockets.
There is a possibility that states may lose some of their revenues after implementations of GST. However, Indian Government has assured to compensate the revenue losses for a period of 5 years. Moreover, GST is a long term strategy planned by government to encourage tax compliance and to help in increasing GDP of India to boost the Indian economy.
Impact of GST on Indian Economy:
The growth of economy of a country is directly proportional to the growth of its people and businesses and there is an increase in the government revenue in the long run.
So, here there are some points covering the impact of GST on Indian economy, which will make you understand in a better way.
India will become a common market after removal of tax barriers with seamless credit that will lead to economies of scale in production and efficiency in supply chain.
Removal of cascading effect of taxes which are embedded in cost of production of goods and services, significantly reducing cost of goods and indirectly promoting ‘Make in India’ campaign.
Currently various tax barriers like check posts and toll plazas lead to a lot of wastage for transporting of perishable items, a loss that translated into major costs through higher need of buffer stocks. A single taxation system could eliminate this obstacle for them.
There will be a transparency in the system as the customer can know exactly how much tax he is paying for what basis.
Another impact of GST on Indian economy is, GST provides credits for the taxes paid by producers earlier in the goods and services chain. This would give encouragement to the producers to buy raw materials from different registered dealers which will bring in more and more vendors and suppliers under taxation laws.
Again impact of GST on Indian economy is, GST shall reduce the overall transaction cost of business, for which businesses shall get benefit from it which also leads to the promotion of ‘Startup India’ campaign.
We can see a reduction in the cost of different goods, if the actual benefit of GST is being passed to the consumers. Now this will enhance demand of products and boost in sales which will benefit the overall economy.
The revenue will increase as the proposed GST tax rate on services is 18%, which is more than the present tax rate of 15%.
There may be another impact of GST on Indian economy which leads to rise in inflation. It is the belief of some experts. However this impact is expected to subside slowly and gradually.
Impact of GST on Common Man:
GST shall potentially have its impact on both services as well as manufacturing sector. There will be a possibility that the common man may hesitate initially but the future effects of GST sounds really beneficial.
The manufacturing costs will be reduced due to lower burden of taxes on the manufacturing sector, hence the prices of consumer goods likely to come down.
A unified taxation system will remove a bundle of indirect taxes like VAT, CST, Service tax, Excise, etc.
Due to the effect of reduced costs, some usable products like FMCG, cars, etc will become cheaper. This will lower the burden on the common man as these products were earlier costly.
The lower prices of the goods will further lead to an increase in the demand of goods. Increased demand will result in increased supply. Hence ultimately a rise in production of goods will happen.
This increased production of goods will lead to more job opportunities. But this only can happen, if consumers actually get cheaper goods.
A unified taxation system will lead to less corruption which will indirectly affect the common man.
As the current service tax rate is 15%, so if GST is introduced, the cost of services like telecom, banking, airline will increase and will become more expensive. The common man will have to reschedule its budget to bear the additional cost.
Being a new taxation system, it will take some time for people to completely understand it.
If actual benefit is not passed to the consumer and if the seller goes on increasing his profits, then prices of goods will see a rising trend.
Although many officers are getting training and also a systematic IT software is being developed for the successful implementation of GST, still it will take some time for the people to understand and follow the process correctly.
Conclusion:
All businesses may it be small or large shall be engaged in the transition from the earlier tax structure to new GST tax structure. However it will take some time to adjust, but gradually they get used to this new system and things will get simplified.
GST is a long term strategy planned by Indian Government. Its positive impact shall be seen in the long run period. Also the positive impact can be seen only if it is introduced at a nominal rate to reduce the overall tax burden.
In the coming years, the impact of GST on Indian economy will grow by widening the tax base and having more transparency in formal economy. So GST is expected to positively benefit the business climate of India as well as the financial system. Both these play a crucial role in shaping the economy.
Last but not the least, because of its transparent character GST would be easier to administer. However, once implemented, Indian economy will have good sustaining growth.
Sourced By Tatwabit Pattanaik