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September 24, 2020

Impact of GST on Indian Economy : Advantages and Core Issues

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Goods and Services Tax (GST)

The Goods and Services Tax (GST) in India is a comprehensive, multi-stage, destination based tax that is levied on every value addition. It is an indirect tax levied when a consumer buys a good or service. GST has replaced many indirect taxes that previously existed in India. The 122nd Amendment Bill of the Constitution of India introduced a National Goods and Services Tax in India from 1st July, 2017.  

GST is a comprehensive indirect tax that is designed to bring the indirect taxation under one umbrella. More importantly it has eliminated the cascading effect of taxes that was evident earlier. After 17 years of continuous efforts the present GST law has come into effect. The journey of the GST law in India was not simple, unlike other laws. From its proposal in 2000 to its implementation in 2017, it has gone through many changes. The Goods and Services Tax is being rated as the most reformative measure proposed in the field of Indirect Taxation in the history of India It has been termed a potential game changer, the single biggest tax reform undertaken by India in 70 years of Independence.

The rollout of the GST on 1st July, 2017 in a single stroke converted India into a unified, continent-sized market of 1.3 billion people. It will bring uniformity of tax rates and structures across the country. It will increase certainty in ease of doing business i.e. make it tax-neutral, irrespective of the place of doing business in the country. In order to understand the features and objectives of the GST Act, first we need to take a quick look at the previous taxation system. Previously taxes were charged at every stage i.e. excise on manufacture, VAT/CST/ Service Tax on sales/services, entry tax or octroi on entry of goods in local area etc. This cascading effect of tax i.e. tax on tax, results in increasing the prices of goods and services. These taxes were imposed by the Centre and the states differently according to the lists in the Constitution of India. Now the new concept of GST is that it would be a single tax system which would be levied on 'supply' of goods and services. It will be jointly imposed by the Centre and States with the recommendation of a federal institution called the GST Council.

There are three different types of levies in GST :
  1. CGST, 
  2. IGST and 
CGST to the Central Tax that is levied by the Government of India on any transaction taking place within a state. CGST replaces all the existing central taxes including Service Tax, Central Excise Duty, CST, Customs Duty, SAD etc. The rate of CGST is usually equal to the SGST rate. Both taxes are charged on the base price of the product.
IGST (Integrated Goods and Service Tax) is applicable on interstate (between two states) transactions of goods and services as well as on imports. This tax will be collected by the Central Government and will then be distributed among the respective States. IGST is charged when a product or service is moved from one state to another.

SGST (State Goods and Service Tax) and UTGST (Union Territory Goods and Services Tax) are applicable on the goods and services supply that takes place in the respective States and Union Territories. It replaces all the existing state taxes including VAT, Central Sales Tax, Purchase Tax, Luxury Tax, Entry Tax, Entertainment Tax, Taxes on advertisements, lotteries, betting, gambling and state cess and surcharge.

The current form of GST has five slabs of tax for goods and services - 0%, 5%, 12%, 18% and 28% on different items. It excludes five petroleum products i.e. crude oil, petrol, diesel, jet fuel and natural gas, as well as liquor and electricity from the purview of GST. In addition, some basic items such as unbranded products, vegetables, milk, fruits, bread, salt, bindi, curd, sindoor, natural honey, bangles, handloom, besan, flour, eggs, newspapers, books etc. are exempt from tax.

As India has different GST rates when compared to a single GST rate in most prosperous nations across the globe, the national economy would undergo a major shift from the time of multiple taxes. From a common man to the richest, the GST will have a significant effect on their lives. While some goods and services would become cheaper, others may just take out more money from the pocket of consumers.

The GST Council and the Ministry of Finance have come up with a solution to record all invoices in one place and collate data for the taxpayer. The processes have been simplified and many taxes have been removed. The whole nation shall report using the same structure irrespective of where and how people or organisations carry on their business. A networked IT system has been deployed by the Ministry to cope with such a huge influx of data. It is called GST Network (GSTN), which is a non-government organisation which manages the entire IT system of the GST portal. It will house all the information of sellers and buyers together, collate the details submitted and maintain registers for future reference and reconciliation at any time.

For properly accounting for the invoices generated by them, Indian taxpayers and businesses have to file certain returns with the government. These returns have to be mandatorily filed, as any non-compliance towards the same may lead to disallowance of input tax credit, apart from attracting penalties and interest etc. Proper filing of information and including the same in the returns is a mandatory process for smooth flow of credit to the last recipient. The returns have been designed so that all transactions are in synchronisation and that no transaction is left unattended between the buyer and the seller. All the data is stored in GSTN, which can be accessed by users/taxpayers anytime online.

The Goods and Services Tax is currently under tremendous pressure to find solutions of some core issues, such as GST filing and forms related issues, which are being commonly faced by all taxpayers.

The GST Council, in its 33rd meeting held in February 2019, addressed the reports of slowdown in the real estate sector and low offtake of under construction houses. Real estate sector, being one of the largest contributors to the national GDP and with the Government's vision on "Housing for All by 2022", GST Rate for affordable housing was slashed to 1% without the benefit of the Input tax credit (ITC) as against the earlier rate of 8%. However, the GST rate for non-affordable housing was reduced to 5% without ITC from the existing rate of 12%.

The impact of GST on the Indian economy has been very positive so far. Inflation drastically reduced as the GST regime brought about a uniform tax structure in the country. The revenue from the taxes for the government also increased with an extended tax net and the fiscal deficit also remained under check. Moreover, exports have grown substantially, while Foreign Direct Investment (FDI) has also increased. India has also improved its rank by 23 positions in 'Ease of Doing Business' in the latest Report of the World Bank. All these achievements were the outcomes of implementating GST in India as a comprehensive indirect tax. The entire process of GST from registration to filing returns is made online and it is also simple. This has been beneficial for startups, as they do not have to run from one place to another for approvals.

Goods and Services Tax has all the ingredients of a modern, seamless taxation system. But its success will depend on taking onboard all the stakeholders and also eliminate all the irritants which go against the principles of GST. Goods and Services Tax will also contribute towards a robust macro-economic environment, thereby increasing investor sentiments. Finally, the consumers will be the ultimate beneficiaries, as it will eliminate the cascading effect of taxes.

Difficult Words with Meanings :
  • Levied - charged, 
  • Value addition - value that is added to a product at any one stage
  • Under one umbrella - together into one consolidated rate
  • Cascading effect - 'tax on tax' effect i.e. tax on one stage is taxed in the next stage
  • Journey - history
  • Reformative - introducing reform
  • Reform - make changes in (something, especially an institution or practice) in order to improve it
  • Indirect taxation - levying of tax on goods and services
  • Game changer - idea or procedure significantly changing the current way of doing something
  • Rollout - making available for the first time
  • Tax-neutral - same rate of tax everywhere
  • VAT - Value Added Tax
  • CST - Central Sales Tax
  • Base price - most fundamental cost of a good or service to a consumer not including taxes
  • Collate - collect together in order
  • Reconciliation - matching invoices raised with returns filed
  • Returns - documents containing details of income required to be filed with the tax administrative authorities
  • Addressed - took care of
  • Slowdown - reduction in business
  • Extended tax net - larger coverage of taxpayers
  • Fiscal deficit - the amount by which a government's total expenditures exceed the revenue that it generates, excluding money from borrowings
  • Seamless - without any problems
  • Taking onboard - bringing together
  • Sentiments - feelings 
shared by Nisheeta Mirchandani

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