Saturday, May 27, 2017

Impact of the GST Bill on the Indian Economy


As you are aware thanks to the news and social media frenzy in the past week, the government of India has declared that the new GST rules will come into effect from 1st of July onwards. In the previous article we had covered the basic questions you might have had about the GST bill. I had mentioned that the detailed impact of the GST bill on the Indian Economy would be covered in a separate article. So, here we are…

A Quick summary of the GST Bill:

The GST Council has finalised a four-tier GST tax structure of 5%, 12%, 18% and 28%, with lower rates for essential items and the highest for luxury and de-merits goods, including luxury cars, SUVs and tobacco products, that would also attract an additional cess. Moreover, with a view to keeping inflation under check, essential items including food, which presently constitute roughly half of the consumer inflation basket, will be taxed at zero rate. The cess is expected to provide additional resources to the central government to compensate states for losses incurred. This will be based on the compensation formula. 

Why the GST Bill may be Good News for India?

The introduction of Goods and Services Tax is step in the right direction in the field of indirect tax reforms in India. If there was one major complaint (Apart from corruption of course) from businesses that wanted to establish themselves in India (both local & foreign) was the complex tax structures and the multitude of state/central taxes that had to be paid by businesses. Without much clarity, these businesses were at the mercy of their auditors plus were always under the scanner of the tax man and could be penalized for tax non-compliance.

By amalgamating a large number of Central and State taxes into a single tax, it would alleviate cascading or double taxation in a major way and pave the way for a common national market. From the consumer point of view, the biggest advantage would be in terms of reduction in the overall tax burden on goods and services. Introduction of GST would also make Indian products competitive in the domestic and international markets. Last but not the least, this tax, because of its transparent character, would be easier to administer. However, once implemented, the system holds great promise in terms of sustaining growth for the Indian economy.

Impact of GST on Indian Economy

Below are some of the holistic benefits that can be expected because of the GST Bill.

Increased FDI

The flow of Foreign Direct Investments may increase once GST is implemented as the present complicated/ multiple tax laws are one of the reasons foreign Companies are wary of coming to India in addition to widespread corruption.

Growth in overall revenue

It is estimated that India could get revenue of $15 billion per annum by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth. Over a period, the dilution of the principles may see that only part of this is accruing.

Single Point Taxation

Uniformity in tax laws will lead to single point taxation for supply of goods or services all over India. This increases the tax compliance and more assesses will come into tax net.

Simplified Tax Laws

This reduces litigation and waste of time of the judiciary and the assesse due to frivolous proceedings at various levels of adjudication and appellate authorities. Present law appears to be much worse and an amalgam of the bad parts of VAT/ ST/ CE.

Increase in Exports and Employment

GST could also result in increased employment, promotion of exports and consequently a significant boost to overall economic growth and factors of production -land labour and capital.

Other Benefits of GST:

  • Reduced tax burden on producers and fosters growth through more production. The existing double taxation system prevents manufacturers from producing to their optimum capacity and restricts growth. GST would take care of this problem by providing tax credit to the manufacturer.
  • Various tax barriers such as check posts and toll plazas lead to a lot of wastage for perishable items being transported, a loss that translates into major costs through higher need of buffer stocks and warehousing costs as well. A single taxation system could eliminate this roadblock.
  • This single taxation on producers and reduced wastage/inventory losses would also translate into a lower final selling price for the consumer.
  • Customers would know exactly how much taxes they are being charged and on what base (Because numerous taxes have been eliminated and the system is transparent now)
  • GST provides credits for the taxes paid by producers earlier in the goods/services supply chain. This would encourage these producers to buy raw material from different registered dealers and would bring in more and more vendors and suppliers under the purview of taxation.
  • GST also removes the custom duties applicable on exports. Our competitiveness in foreign markets would increase on account of lower cost of transaction.
  • The proposed GST regime, which will subsume most central and state-level taxes, is expected to have a single unified list of concessions/exemptions as against the current mammoth exemptions and concessions available across goods and services

All this sounds promising isn’t it? What are your thoughts on the GST Bill? Do sound off in the comments section.


Also, there will be subsequent articles published in the coming days elaborating the sector wise impact of the GST Bill. Hope you find them useful.
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