Impact of GST on the Indian Economy

Monisha Chaudhary

30 Mar, 2024

In six years since the implementation of GST, the number of GST registrations has surged by over 14% compounded yearly, from roughly 65 lakh to approximately 1.4 crore. Since its formation, the GST Council has played an important role in GST decision-making, including tax rates, revenue distribution between the central and state governments and exemptions. So far, it has had 51 meetings. GST collections increased by approximately 11% year per year, from 8.76 trillion in 2018-19 to 13.25 trillion in 2022-23.

With effect from July 1st, 2017, India became the 161st nation in the world to embrace the GST. With the slogan “One nation, one tax,” the introduction of the GST was intended to streamline the country’s indirect taxation system. India has selected the “Dual GST model,” which entails that the central and state governments would both impose the tax at the same time. GST is charged when goods and services are supplied. There are two further categories of supply: intra-state supply (inside a state or union territory) and inter-state supply (between two states, two union territories, or a state and a union territory). The GST rates in India are pre-defined in four slabs, which are 0%, 5%, 12% and 28%. The three types of taxes that are included in GST are:

• CGST
• IGST
• SGST

Why was the implementation of the Goods and Services tax necessary in India?

The tax laws prior to the Goods and Services Tax in India were very old; they had been in place since 1950. There was a need to modernize these tax laws and make them competent with the current modern and global world. The introduction of GST was vital to overcome this challenge. Goods and Service tax stimulates the growth in the economy, tax compliance can be improved, and a transparent and efficient economy can be fostered. To develop into a powerful and rich country, it is essential for India to convert into a unified tax system. There wasn’t a single centralized tax that applied to both goods and services. GST was, therefore, implemented. Several indirect levies that were in force under the former tax system have been replaced by the GST. The benefit of a single tax is that each state applies the same rate to a specific good or service. By ensuring that indirect tax rates and structures are uniform across the nation, the GST has improved corporate certainty and efficiency.

Impact of GST on Indian Economy

The economy is boosted:

• The boost in the Indian economy has been one of the most significant effects of the implementation of GST.
• Several businesses operated in the shadow economy during the previous tax system in order to reduce their tax obligations.
• Under the GST, exports are considered a zero-rated supply. As a result, there is no tax on the items exported from India. Indian products improved their level of competition in global markets as a consequence.
• The requirement for businesses to register and file tax returns under the GST, however, has raised the number of businesses that are registered and, as a result, boosted the government’s revenue from taxation.
• The GST tax code’s reduction in complexity, omission of interstate restrictions, and elimination of inspections and entry tax barriers at state borders boosted efficiency and reduced logistical costs.
• This aided the economy’s growth, particularly in areas like manufacturing and logistics.

The tax structure is comparatively simple:

• The country’s tax structure has been made simpler by the GST. India’s tax system has been made simpler as a result of the implementation of GST.
• Businesses were required to abide by several tax rules, including service tax, excise duty, VAT, and others, under the previous tax system.
• All of these taxes have been replaced by the GST, which makes it simpler for businesses to comply.
• GST is a uniform tax, making it simpler to calculate taxes at all levels of the supply chain.
• Customers and producers may both clearly understand the amount and the basis of the tax they have to pay as a result of this. Additionally, dealing with tax authorities and officials can be avoided.

Tax Revenue is increased.

• The government has seen a jump in tax income as a result of the implementation of the GST.
• Higher tax revenues are the outcome of the tax code’s simplification and a rise in the total amount of registered businesses.
• To raise additional revenue, the GST Council has additionally altered the tax rates. For instance, the tax rate on a number of products was raised from 12% to 18%, which enhanced tax receipts.
• Since GST has a larger base, it is able to tax a greater range of goods and services.
• Consequently, GST has increased the government’s tax collection. The tax revenue ¹ in the year 2023 was up to 5 lakh crores.
• Government income has significantly increased as a result of GST.
• GST revenue was collected in the amount of INR 7.41 lakh crore in the first year of implementation, rising to INR 11.77 lakh crore in the second.
• The government’s financial situation has improved due to the increased tax collection.

Impact in exports

• Due to less customs duty because of the implementation of GST, there has been an increase in exports.
• The GST has also reduced production costs in the regional markets. The country’s export rate has grown as a result of all these reasons.
• Global company expansion has gotten more competitive as a result of this.
• GST has provided the whole nation with a uniform taxing structure, which has made it easier to move commodities throughout the nation. Certainly, this has improved business processes in India.

Increased Competitiveness

• Production has been boosted with additional tax savings, which opens the door for wholesome competition.
• Additionally, this contributes to enhancing the image of Indian products and services on global marketplaces, which further strengthens the economy.
• The cascading impact of taxation has been avoided by the GST, which has reduced tax obligations across most industrial sectors.
• As a result, the price of products and services as a whole has decreased, which increases the competitiveness.

E-way Bill system

• In the current global world, technology plays a very important part in any organization. Similarly, in the working of the country, technology plays a very crucial role.
• With the introduction of the GST system in India, the concept of the E-way bill system also came into play. With a few exceptions of the first technological hiccups, the e-way bill system has now been made compliant and simple with the tax system.
• A total of 56 crore e-way bills from both interstate and intrastate were made in the year 2019, which shows a thirteen per cent growth; this was further boosted to 63 crore in the year 2020.
• This system of billing has made errors to a minimum and also helps in tax evasion issues.

Tax evasion is reduced.

• Increasing government expenditure is a key indicator of a strengthening economy.
• India’s yearly public spending is continuously rising, which enables its economy to expand and prosper. Reducing instances of tax evasion is one of the main causes of the same.
• In the tax system prior to GST, tax evasion was a very common practice done by many taxpayers, which would eventually lead to loss to the government.
• With the GST system in place, all businesses are required to register and have a GST number; along with that, they have to file their returns regularly in many monthly and quarterly time periods.
• The e-way bill system has made it difficult to carry out tax evasion.
• The GST has had a significant influence on tax avoidance.
• GST increases transparency throughout the whole tax process because it is an online taxation system.

Less Logistic costs

• With GST, the logistic costs of business have seen a decrease.
• As a result of the implementation of GST, logistic expenses have been reduced as several taxes have been eliminated, which were previously levied.
• The goods moving across states are now at lower prices with the implantation of a singular tax.

Tax compliance

• Compliance with taxes has increased as a result of the GST in India.
• The mandatory rule that companies have to register and submit their regular tax returns has led to a rise in registered companies and made tax evasion more challenging.
• To promote adherence to the taxation system, the government has also created a number of measures, such as the GST Compliance Rating, which will be helpful in tax compliance

Impact of GST on different sectors in India

1. Manufacturing Sector: The manufacturing industry has benefited from the implementation of GST. The cost of production has decreased as a result of the elimination of certain levies. The frictionless movement of commodities across state boundaries has also increased the effectiveness of the supply chain, which has raised the overall competitiveness of Indian businesses.
2. Service Sector: The GST has had an advantageous effect on the services industry, which accounts for a substantial portion of India’s GDP. For businesses in the services sector, compliance has been made simpler by the abolition of various taxes and the enactment of a single tax. By lowering the cost of services, the GST’s introduction has also increased the services sector’s competitiveness. The input tax credit system (ITC) has proved to be an advantage for a reduction in cost for the services in the service sector.
3. Small and Medium Business: GST has introduced a composition scheme that can be signed up by all the small and medium-sized businesses in India. This scheme presents them with a plan to pay taxes according to an annual revenue plan. The business has to pay only 1% GST if the business makes 1.5 crore in one year. For the business with a turnover of Rs fifty lakhs will have to pay a 6% GST. These types of schemes have helped and increased the compliance expenses for SMEs, which now have a profitable impact on them.
4. Real estate sector: The real estate had both positive and negative impacts of GST. With the implementation of GST, the price of real estate has increased, which has increased the tax burden for the taxpayers. On the other side, the cost of building house materials have been decreased. And the transparency has also increased. 
5. E-commerce: The E-commerce business owner has experienced significant changes with the implementation of GST.  
6. Textile: One of the industries that employs the most skilled and unskilled workforce is Indian textile. With the elimination of customs tariffs, the figures are certain to rise, given that India’s textile industry accounts for 10% of all exports. The GST has had a significant influence on the textile business, including advantages such as input credit chains, decreased production costs, and input credit on medical items. Additionally, ready-made clothing priced under Rs. 1,000 is excluded from paying any GST.
7. Automobile: The automobile sector pays around 20%-22% GST. Before the implementation of GST, this sector was imposed 30% – 47% taxes. There have been significantly fewer transportation times as compared to the past.
8. Telecom: The telecom industry now falls under the 18% slab in GST. Previously, the tax implemented in the telecom industry was around 14-15%. The implementation of the GST has increased the prices in this industry.The telecom industry will take a little bit more time to adjust to the GST system. There has been a cost cut in services related to the telecom industry. The input tax credit is also low in this industry.  
9. IT:  The IT sector comes in the 18% slab in GST. This sector has experienced a positive impact after the implementation of GST. The numbers have seen a steady boost in the IT industry.
10. Pharma: The implementation of GST has proved to be advantageous for the Pharma industry.The implementation of GST intends to make healthcare cheaper for people in India. Many exemptions and benefits have been given to this sector in lieu of GST.

Conclusion

Since its adoption, GST has had a huge influence on the Indian economy. Its simpler structure and decreased tax cascading made conducting business in India easier. GST is one of the most significant tax reforms in Indian history. GST has various benefits and drawbacks that influence buyers and sellers. The use of a goods and services tax in conjunction with an IT system aids in the transparency of government income. It is expected that malicious conduct linked to theft will be eradicated with the adoption of GST, the benefit of which is shared by both the government and the consumer. GST has both a beneficial and a negative influence on the Indian economy. Due to the adoption of the GST, certain industries prospered while others are still struggling. However, it has many advantages as a taxing structure and will eventually be good for the economy. It promotes economic growth via transparency and causes loss in some industries due to rising commodity costs, but a country’s uniform taxation structure has helped to ease corporate operations.

Frequently Asked Questions

1. https://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS