Steffy Smith
Introduction
The Goods and Services Tax Act (GST Act) is one of the most critical fiscal changes that have happened in the post independence era in India. The GST Act was passed in June and it came into force in the country in July to replace several indirect taxes that were collected by the central and state governments in India.
This is an end to end national GST with multiple stages of tax at the point of destination and focuses on each level of value creation in an attempt to make the Indian market more integrated with the free movement of goods and services across borders of different states.
This article aims to explain GST in detail the manner in which it is structured and its impact on the Indian economy businesses and consumers.
Types of GST
GST in India is structured into four main components to ensure a seamless tax flow and revenue sharing between the central and state governments GST in India is structured into four main components to ensure a seamless tax flow and revenue sharing between the central and state governments
Central Goods and Services Tax (CGST)
Imposed by the Central Government on sales or transactions of goods and services within the same state.
State Goods and Services Tax (SGST)
Imposed by State Governments for the supply of goods and services within that state’s boundaries.
Integrated Goods and Services Tax (IGST)
Imposed on the central government transferring the goods and services and also imports.
Union Territory Goods and Services Tax (UTGST)
Collected on movement from one UT to another and consumed within the UT.
GST Rate Structure
GST is a multi tier tax and its rates are set up at % respectively. These rates are fixed by the GST Council keeping in mind the socioeconomic factors as well as the need to maintain the principle of neither excessive nor exiguous revenue payload.
Necessities like food grains remain out of GST jurisdiction and another tax rate of % is levied on luxury items or services. Sometimes an additional cess or surcharge is also provided for loss of revenue.
Input Tax Credit (ITC)
The other strength of GST is that it introduces the ITC mechanism under which the business is in a position to take credit for the taxes paid on the inputs. This does away with tax shunting since tax is imposed only on the activity that results in the increased value of the product at each level of production and distribution.
The result of this is that the taxpayer should be the final consumer improving transparency and minimizing tax costs.
GST Compliance and Filing
The system works in the following manner firms are expected to file returns regularly under GST with information on their sales purchases and the tax they pay. Annual information returns are categorized under monthly returns. The GSTN is a portal that is used to manage the infrastructure designed for GST where taxpayers can file their returns and make payments.
Effects of the GST
Implications to Manufacturing
The manufacturing sector has benefited immensely from GCT. Reducing the number of taxes and the implementation of ITC has also helped reduce the cost of production where the cost of production for Indian manufacturers has been made to be low both locally and across other nations. GST has also helped to remove the cumbersome tax structure that was an added cost to the producer and customers.
In terms of supply chain GST has changed the way business is done through the adoption of established and efficient processes that have significantly reduced the cost of logistics hence fuelling the growth of the sector.
Effect on the Services Sector
GST and the service tax industry transition from service tax to GST has brought some major changes to the service tax industry. As the GST has incorporated services in the essential structure it has widened the base of this tax and simplified registration and payment for service suppliers.
This is contrary to some service sectors where there are increased tax rates that have unfortunately affected consumers. However this has not affected the services sector and vice versa because of the unity of the tax structure the abolishment of cascading taxation and in general the relevance to the economy as a whole.
Effects on SMEs
Some of the key stakeholders that have been affected to a certain level by GST are small and medium enterprises (SMEs). On the one hand GST in fact simplified the tax structure and made the taxpayers free from the burden of multiple compliances. At the same time the frequent reporting and compliance with GST norms enhanced the operational work of SMEs.
The Federal Government of Australia has put in place and outlined the differential threshold exemptions as well as the various schemes that are aimed at helping SMEs change to the GST environment. These measures include the list of small taxpayers and simplification of their compliance procedures.
Interest Rate Changes and their Effects
On the one hand GST has brought some benefits to the consumers while on the other it has also exposed negative impacts. The removal of the cascading effect of taxes has reduced the total taxes that are applied to many commodities leaving lower prices of commodities currently.
Nonetheless the increases in the amount of tax that is applied to specific products and services have inflated the prices of the goods and services that the clients pay. In general GSTs objective is to optimize the tax system to standardize and make tax policy more easily understandable for people in the future.
Effects on the Real Estate
The real estate sector has also been a major beneficiary and victim of GST. Still some black money exists in the sector due to the non implementation of the GST in its complete form. However the fact that GST is now chargeable on under construction properties has put extra costs on the buyer.
The government has been working to ease these concerns by lowering the GST rates and making input tax credits available for new housing projects which is expected to increase the demand for affordable homes.
Challenges in GST Implementation
Technological Challenges
It was inevitable that IT structures would be implemented for the GST launch to deal with the tremendous quantity of receipts and related data. However when GSTN was launched it was plagued with a number of technological bottlenecks such as system crashes slowness and hiccups in return filing.
Certain features have also been specially developed to deal with these issues and improve the efficiency of the GST portal through constant innovation and changes.
Compliance and Administration
From the old to the new tax the shift to GST has seen massive paradigm changes in the way businesses are managing their tax compliance. The need for periodic tax filing and the accompanying mechanisms such as invoice matching and account reconciliation could be especially difficult for small business entities.
Even the government has made various efforts to simplify the compliance procedure and extend help to businesses converting to GST.
Resistance from States
It was therefore understandable that the Central Government needed all states to agree to the integration of a number of state tax systems in order to implement GST. What made some states reluctant since the concept was first introduced was the fact that they stood to lose both income and control.
GST Council established mechanisms for dialogue and consensus among the states to address these concerns. The continuous dialogue by the GST Council helped implement compensation and ensure fair allocation of revenue among the states.
Benefits of GST
Simplification of Tax Structure
GST has made a massive contribution to simplifying the tax system in India as the indirect taxation system has been reduced to one direct tax GST. This has removed the hassle of complying with numerous tax laws that were impossible for most businesses to understand.
Increased Revenue Collection
This has been on account of the expansion of the tax base as well as a higher compliance rate that has resulted in enhanced revenue generation for both central and state governments. The efficient tax collection mechanism under GST has led to curbing tax evasion and a high number of businesses entrapped within the formal economy.
Boost to Economic Growth
One of the ways in which GST ensures a single national market is by breaking down barriers between the states in the country and also encouraging the free movement of goods and services from one part of the country to the other. This has resulted in increased efficiency reduced costs and enhanced competitiveness and it has offered a boost to the economy.
Encouragement of Formal Economy
The introduction of GST has encouraged investment in the formal economy. Goods and Services Taxes have also contributed to formalizing the informal economy because companies were required to comply with tax norms and register under GST.
Case Studies on issue of GST
FMCG Sector
The range of goods that fall under the category of FastMoving Consumer Goods (FMCG) has certainly seen a positive impact of GST. The elimination of the sales dividend and capital gains taxes has also ensured that the seamless flow of input tax credits lowers the cost of production and distribution.
This has helped FMCG firms improve the efficiency of supply chains and share cost reductions with consumers in the form of price reductions. Moreover the reduction of the tax rates has helped the FMCGs increase and maintain compliance.
Automobile Sector
One of the issues with the automobile sector was that the goods were subjected to taxes like excise duty VAT CST and other kinds of taxes which have been righted with GST. The addition of the unification of rates has brought about a reduction in cars tax load. Moreover the input tax credit on raw materials and components has lowered automobile manufacturers production costs.
However recently the GST rates for luxury cars and SUV categories have also been increased hence making both segments costly.
Future Prospects of GST
Continuous Improvement
GST is an ever changing taxation mechanism that is used to cope with issues and inefficiencies. The GST Council frequently updates periodic rate changes compliance mechanisms and technology. Prevent GST from resulting in an adventitious or unintentional harm to all concerned.
Integration with Global Trade
With its rapid integration with the world economy GST finds its importance in reducing indirect taxation in inbound and outbound trade. The saturation of GST with global tax standards allows for convenience in international trade and capital goods inflow.
Role in Digital Economy
While applying GST to the Digital Economy the former is expected to emerge as an important factor in the latters growth. The current reduction in the complexity of the tax system and a focus on digital compliance respectively help companies embrace technological change.
Possibilities of a single tax
As the model continues to evolve in the long term GST will likely be a single rate tax. A broad based tax rate would eliminate the problem of classifying income promote compliance and simplify and increase the fairness of the tax system.
Sectoral Impact of GST
Impact on Agriculture
The reason why agriculture has been discussed in this case is that this sector of the Indian economy has also been affected by GST. The tax on most agricultural products is also zero rated or rated at a lower level under GST therefore incurring a lighter tax burden on the farmer.
The effectiveness of grants in the agricultural sector has also been complemented through the provision of input tax credits for acquisitions of inputs like fertilizers pesticides as well as farm equipment. This situation has imposed challenges on small and marginal farmers due to the escalated compliance measures.
Impact on Ecommerce
The effects that the ecommerce industry has witnessed under the GST regime. With regard to taxation online merchants have a simplified framework for online taxation with the removal of VAT and other state based taxation for online transactions.
The enforcement of the TCS has improved compliance and collection of income from the ecommerce sector. However the sector also has challenges associated with compliance and the difficulties of various state regulations.
Impact on Infrastructure
In the infrastructure sector the positive impact of the GST is through conduction to the tax base for such objects as construction materials and services. The issue of input tax credit has made the completion of infrastructure projects much more cost friendly to developers.
The inefficiency in the tax system has also been eliminated by simplification which has translated into faster processing time and delays in projects.
Impact on Financial Services
GST has had a positive and negative impact on the financial services sector. According to the analysis given above the total tax levied on the banks and financial institutions engaged in the provision of various services has increased gradually over the years. Still the provisions for managing input tax credits have considerably improved.
The industry has undergone a number of changes regarding the acceptance of the new compliance standards and it means that there have been substantial changes in the systems and procedures that have been used in this sector.
GST and Economic Indicators
Impact on GDP Growth
This has been beneficial for India in terms of the GDP since it has ensured that trade is conducted in a more efficient and unified manner. It has also been noted that an overall decrease in the tax rate and the removal of intrastate trade barriers has made more business and investment feasible.
It has led to improvement in GDP growth as better conditions facilitated by the ease of doing business have attracted investors both locally and internationally.
Impact on Inflation
The success of GST in reducing inflation has been complex. Taxes such as cascading effect taxes have been effective in lowering the prices of things but the opposite is true for item based taxes which have led to the inflation of such prices. On the whole GST is intended to provide stability and predictability in the realm of taxation so as to ensure long term inflation control.
Impact on Employment
The employment implication of the implementation of the GST is that it has indirectly promoted formalization. The advantages of the tax cuts led businesses to open new branches so more jobs were created. As a result of GST sectors like manufacturing ecommerce and infrastructure have also grown in employment levels.
Effects of GST
Many aspects that GST has touched in the country one of the many has been the informal economy. The need for business units to register themselves under the GST Act and follow the tax provisions has led to the formalization of the economy.
This has increased transparency and accountability and thereby reduced the amount of black money that transacts or unreported sales and purchases. It has also formalized the economy thus raising the tax base and hence allowing for more revenue collection under GST.
GST and Digital Transformation
Growth in sales tax has been another major form of promoting digital innovation in India. The focus on digital compliance and has motivated businesses to employ digital practices in their operations which has enhanced efficiency and transparency. GSTN runs the common portal that enables taxpayers to make returns and pay more easily than by manual means.
The introduction of GST has also introduced digitization of the tax system hence providing better data for analysis and observation of tax administration and enforcing compliance.
GST and Consumer Behavior
There is no doubt that the decisions made regarding the implementation of GST have had various impacts on consumer behaviour. On the other hand the cut in the general rate of duty for many commodities and services has increased consumer purchasing power.
Tax codification and structure have enabled consumers to easily understand the amount of their tax expenditures while making the purchase. Nonetheless the hike in some of the products has led to changes in consumer preferences and behaviours.
GST and Government Revenue
Thus the introduction of GST had a huge implication for government revenue collection. Tax increases and reforms on tax collection have seen the central and state governments record increased taxation revenue. With the efficient tax collection mechanism in place under GST people can hardly avoid taxes.
So many business operations that were done through unofficial channels are now being operated through formal channels under the legal framework of GST. The rise in tax collection through the GST scheme has also helped generate more revenue that the government can use to develop the country and for other welfare activities.
GST and International Trade
GST has reduced the tax implications for doing business on an international level and has helped increase exports and imports as well as foreign investments. One of the ways in which GST has enhanced international trade and helped to reduce international barriers is through the harmonization of the system with the global standards for taxation.
The fact that relying on exports provides the opportunity to claim input tax credit has significantly contributed to the competitive advantage of Indian products and services on the global market. GST has also improved processes at the borders and customs services have been streamlined to reduce delays and the cost of doing business for exporters and importers.
Future Prospects of GST
GST will continue evolving in order to tackle existing and future challenges and to make further improvements to the concept of GSTs efficiency. The GST Council will play a major role in revisiting the rates of certain commodities addressing the adequacy of compliance norms and addressing the need for technological upgrades that would help to make GST economically beneficial for all.
The increased use of GST means that we could reach a long term single level tax rate by which the tax structure will become even simpler the issue of classification will be removed and compliance will be further strengthened. Implementation of GST and its adoption in the global trading arena and its use to aid digital transformation will still be important forces for the growth of the economy in India.
Conclusion
The GST is one of the revolutionary improvements in the Indian tax structure which has led towards providing a single and effective taxation system. Initially there was resistance towards it but various common benefits it posed such as the simplification of the tax the removal of the cascading effect of tax assessment the enhanced collection of revenue and the general improvement in the economy.
It has been observed that GST has varying effects on different sectors of the economy with many sectors showing positive effects while others recording negative impacts. Looking ahead GST has impressive prospects and can become one of the instruments for further improvement of efficiency and transparency of the taxation system and promotion of the national economy in India.
