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Impact of GST on Indian Economy

Impact of GST on Indian Economy

by Tandava Krishna

WHAT IS THE IMPACT OF GST ON INDIAN ECONOMY

The source for any country to arrange funds for its resources and social welfare activities is the revenue generated through tax collection. It is the biggest source of income. Rightly so, the tax system is the backbone of any developing nation.  This system is managed by the central government in discussion with the local government. In India, the tax system is divided into two aspects, one is the direct taxes and the other is the indirect tax. The direct taxes are the ones that you directly pay to the government and are levied directly and cannot be directed to anyone else. The administrative body of direct taxes is the Central Board of Direct Taxes. Most of the direct tax is incoming from the Income Tax. The other is the indirect tax which is collected indirectly from the people. This tax is levied on goods and services. This tax is levied on products and collected by the person selling the product. The types of indirect taxes are sales tax, service tax, VAT, customs duty, etc. It is the fund collected from both the sources, the direct and indirect are the real means of developmental activities in the country. It is the combination of both that makes a good system of taxation.

GST and Tax Effect On Goods & Services

India had a very complicated tax structure, mainly its indirect tax system. The existing laws related to them could be interpreted in different ways in different states and were different for all the goods and services. India needed a simple tax structure and it came with the announcement of the historic Goods and Services Tax aka GST in the mid of 2017 changed the dynamics of business in India. The mainstay features of GST as when announced were to remove the cascading effect i.e., it removes the Tax on Tax effect and provides a common national market for Goods and Services. It has a single umbrella tax rate for all goods and services which will be decided by Union and State Governments. The GST hence is a comprehensive tax levied on the manufacture, sale, and consumption of goods and services at a national level.

The Real Impact

The GST was said to have brought positive changes like overall reduction in prices for consumers, broader tax base, decrease in “Black” transactions, free flow of goods and services, bring transparency in the tax system, improve the cost competitiveness of goods and services and would create a business-friendly environment and thus increase the tax-GDP ratio and lead to development. These benefits looked great on paper but are we sure that we saw actual results indicating any growth and prosperity? The ground story says a totally different scenario. India adopted a dual GST and no National GST. It makes the entire structure fairly complicated yet again. The center had to coordinate with all the 29 states and the 7 union territories which created both economic as well as political issues. The states lost their say in determining the rates once the GST was implemented. The revenue that was generated by and its sharing became a matter of contention as there was no consensus regarding the neutral rate of revenue. This means the states lost their income and the money was directed towards the Centre and resulted in poor infrastructure and disaster management capabilities of the states. The Pre GST service tax which was 15% was increased to 18-20% post-GST. Apart from a few, most of the services like air travel, hotels became even more expensive. Since the service provider did not absorb most of these taxes, the additional taxes were paid by the customers, it implied that the goods and services contrary to what was expected became more expensive. It was deduced that the reforms were not made by taking consideration of all the classes of people. The lower and middle class was most affected and the small businesses were doomed. The implementation of the GST network as introduced by the government required a highly sophisticated IT or Technical infrastructure which has no scope for flaws, but as the ground reality suggests, most of the businesses in India are run in an unorganized way. People are poor and lack educational qualifications and understanding of running the computer properly. When the new system was introduced, it created a ruckus and a great amount of confusion for the Medium and Small Scale Enterprises (MSME), and most of them gave up on their businesses. The GST was focused on the Business persons and not the service providers. With GST, if everything related to Infrastructure and technical understanding was fine, a business was supposed to excel but it had put a burden on the consumers such as Employees and Workers because the prices of the commodity had risen contrary to declination as expected and the income is almost the same. Consumers had to pay extra money from their pockets which resulted in declination in the purchase and resulting in that, the growth is the market was stagnant. One of the agendas of GST was to eradicate Black money, it is very hypothetical as Black Money is existing as a part of the system and requires a lot more effort than this for its eradication. The one said the benefit of GST was that even for small-scale business persons, they can pay taxes according to their annual turnover, as the result there was an increase in paperwork for the business owners and complications lead to even more black marketing of goods. The implementation of GST increased the unemployment rate from its previous 3.39% to 6.06% during its early implementation and has increased even further since then.

The taxation system is very important for the economy of the country as it is the only source of economic growth and infrastructural development of the nation. It should also maintain equity amongst the different income groups as there is a huge earning gap in our country. The Indian Goods and Services Tax, which is the second-highest tax rate in the world has devastating effects on poor people. The consumption and production of goods and services are definitely rising but because of the multiplicity of taxes in the current tax system, organization complexities and conformity cost is extremely high. 

The GST, without a doubt, had a reasonable and promising future but with wrong implementation and the haste to pass the bill, the country with such a stunted infrastructure was not ready for this radical change.

 

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