As a developing economy, India has to focus on several facets to ensure stable economic development and growth. Taxes are amidst these said aspects, as they play a significant role in determining government revenue and earnings.
Indian taxation system has always encountered criticism on every turn, and it was high time that it needed a reassessment. The same happened on 1st July 2017 when the nation decided to adopt a unified tax policy throughout the country. A team of 33 reputed members was formed, and Nirmala Sitharaman, the Finance Minister, acted as the chairman of gst Council.
GST was aimed to simplify the complicated taxation hierarchy by incorporating them into one. After its implementation, every indirect tax, like service tax, CAT, entertainment tax, and VAT were rendered null.
The step was undoubtedly a major one, but in a country as diverse as India, any decision of such magnitude is bound to trigger numerous aftereffects. Whether you run a business or belong to the consensus; you must have weighed out the pros and cons of gst at least once.
It is only viable for any individual to do so, and if you wish to get some in-depth knowledge regarding the effects of GST on the Indian economy, then read through:
What is Goods and Services Tax?
Before delving into the exhaustive details of the tax’s impact, let’s gain the surface-level knowledge about it. GST is imposed on the production and trading of goods and services throughout the nation. It is charged at each production process and can be considered an end-based tax.
By end-based, it is meant that the tax is collected at the final consumption point. For instance, if any product is produced in Delhi and is being sold in Gujarat, then the tax will be charged in Gujarat. GST works similarly to VAT in the sense that it accumulates whenever some value is added to the commodity.
Types of GST
There are four types of GST, namely, Central Goods and Services Tax (CGST,) State Goods and Services Tax (SGST,) Integrated Goods and Services Tax (IGST,) and Union Territory Goods and Services (UTGST.)
- CGST is the tax collected via the central government when the goods and services are traded intrastate.
- SGST is the tax collected by the state government, and it comprises taxes like entry tax, betting, entertainment tax, gambling, luxury tax, and lottery winnings tax.
- IGST works as a mixture of CGST and SGST, being charged on the trade of goods and services amidst two states. The computed tax is then shared between the state and central government.
- UTGST is the tax collected on the trade of goods and services taking place within any five Indian union territories.
The Effects of GST on Indian Economy
Tax Structure Simplification
Simply put, GST acted as the prime catalyst in the simplification process of the Indian taxation system. Working as a single tax, GST has simplified the tax calculation process at every supply chain stages.
With GST, both the consumers and the producers get a clear perception of the amount they are paying in the form of taxes. Furthermore, the aggravation of dealing with tax authorities and administrators have significantly reduced.
Support to Small and Medium-Sized Organizations
Any small or medium-sized organization is now able to register itself under the Composition Policy proposed by GST. The scheme states that the relevant firms now have to pay their taxes based on their yearly turnover.
You can get a better idea with a simple example. If your business is registered under the scheme and you have an annual turnover of 1 crore INR, then your computed GST will be 1 lakh (1 %.) On the other hand, if your firm is not registered and your annual turnover accounts to 50 lakhs INR, then your GST will be 3 lakh (6 %.)
Enhanced Tax Revenues
With a more straightforward tax system, the economy is equipped with more liberty and compliance. This reduces the tax burden, thus encouraging more consumers to turn into taxpayers. This ultimately leads to an increase in government revenue as the removal of a multitude of tax layers widens the overall tax domain.
The previous taxation system asked for approx—30 % of the organization’s total product cost. However, after imposing the GST, the overall taxes have severely gone down. This directly means that the end-user is charged fewer taxes, allowing the firms to increase production and sales.
As the tax burden goes down, the company is left with more resources they can dispose of, enhancing, and mass-producing the product.
Assisting Manufacturers & Consumers
Other than directly aiding the organizations save more on taxes, GST also helps them avoid taxation hurdles in the form of check posts and toll plazas. The said hurdles might seem trivial on the surface, but there are instances when an unreserved product is tampered due to the constant halts at tolls and roadblocks.
To avoid such mishaps, organizations were forced to pile up stocks of the product, thus accumulating more storing and warehousing costs. Now that the firms are free to trade within states without being burdened by the taxes, they can easily improve their revenues.
Moreover, the firms can then present the product at a competitive price, helping the consumers avail it at lower prices.
As the manufacturing cost within the domestic market decreases, the competency of Indian products in the international market enhances several folds. Additionally, the customs duties charged on goods’ export has also gone down, courtesy of GST.
All this caters to the exporters dealing with the multinational manufacturers operating on different cost structures. As companies are getting more competitive on a global scale, no one leaves any opportunity to compete for a promising market.
With the constant growth of the Indian economy, it becomes a significant playfield for the corporations.
To Wrap Up
The Indian taxation structure has undoubtedly been simplified after the introduction of GST as it accumulated every tax within the nation to form a unified tax system. This helps remove the tax hurdles faced by ambitious manufacturers, allowing them to trade freely throughout the nation.
However, this does not negate its limitations like taxation issues faced with the stock transfer, inter-state services, and the incorporation of some state & central taxes. Even after putting all this under consideration, the decision to impose a unified tax system undoubtedly aids the economy steadily.