Impact of GST on the Indian Economy Impact of GST on the Indian Economy

The Goods and Service Tax (GST) was implemented in India from 1st July 2017, approximately 12 years after being first proposed in the parliament in 2006 by P.C. Chidambaram, the Finance Minister during the UPA rule.

The tax overhaul is one of the biggest reforms in India's tax code since India's declaration on independence in 1947. GST replaced Service Tax, Excise duty, VAT, Customs Duty, and a slew of other levies charged on Indian businesses.

On the eve of the first anniversary of this landmark reform, we attempt to review its performance and impact on the various drivers of the Indian economy.

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Tax Structure

Simplification of the tax structure is one of the major pillars of the GST regime. With its introduction, the practice of charging differential tax rates on goods (excluding fuel) across various states came to an end. Keeping the 'One Nation One Tax' adage in mind, goods are broadly classified into 4 tax-slabs. Moreover, several essential goods of mass consumption have been declared tax-free.

It is important to note that all types of fuel have been kept out of the ambit of GST as taxes on fuel serve as a huge contributor of tax for the central and state governments and used by them to manage fiscal positions. Any major reduction in these taxes would put a considerable strain on the government's ability to manage national and state finances.

Also Read: Updated list of tax rates levied on different goods

Increase in the Number of Registered Tax Payers

Another reason for implementing GST was to formalize the economy and bring more traders under the tax net. The Economic Survey result released in January 2018 has revealed that 34 lakh businesses registered for a GST number during the first 6 months of GST. This has increased the number of taxpayers base by 50%. Besides the immediate registrations, several unregistered dealers are also expected to obtain GST numbers as enterprises continue to show preference towards registered entities.

Elimination of the Cascading Effect of Taxes

As per the GST rules, a trader can claim credit for the taxes he has paid on goods and services used for his goods. This is beneficial to the final customer as they are paying taxes on just the final goods and not a double tax, i.e., the tax paid by the trader on the input materials and on the final product as well.

This has made several goods such as textiles, daily consumables like soap, and construction material like cement and paints cheaper.

To make sure that the benefits of lower taxes are passed on to the consumers, the government has constituted a National Anti-profiteering Authority.

Increase in Documentation

Every registered trader had to file 3 returns per month (now reduced to 2) under GST and one annual return. Additionally, there are other returns for input service distributors, job-work, etc. which add to the compliance burden. This has resulted in an increased cost of compliance as all businesses have had to hire additional resources for maintenance of tax books and filing the various returns.

Service providers have been especially hit with the compliance requirements as they now have to file a minimum of 25 returns in a year, up from one every 6 months under the previous laws.

Increase in Prices in the Medium Term, Benefits in the Long-Term

When the GST was implemented last year, some industries that began paying a higher tax, like restaurants, immediately hiked their prices to pass on the impact to its customers. However, when the government reduced taxes late last year, it is widely believed that the benefits have not been passed on to the customers.

Similarly, the government's anti-profiteering body has asked for clarifications from FMCG companies if the dual benefits of price reductions and Input Tax Credit have been passed on to the customers.

As mentioned above, since this is the first year of the regime, most issues are expected to be ironed out as companies exhaust their old inventory and the entire supply chain accounts for the new tax rates.

Adverse short-term Impact on MSMEs and Exports

The micro, small, and medium enterprises (MSMEs) were just recovering from the demonetization drive implemented in November 2016 when GST was implemented in July 2017. The biggest impact of GST in the short term has been felt by this group. This was primarily due to the hiccups in compliance and inefficient government machinery to process and refund tax credits during the initial months. As per a report by Dun and Bradstreet, the Daily Sales Outstanding (DSO) of MSMEs has increased from 58 days to 70 days, increasing their working capital requirements.

Similarly, MSME export houses have also had to bear the brunt of a delay in processing of tax credits. The initial issues in processing the Input Tax Credit (ITC) severely marred operations. Also, the requirement of higher ticket loans from banks and NBFCs made businesses lose profits in the short-term.

Offers India a Competitive Edge

GST's primary motto of 'One Nation One Tax' is increasing India's competitiveness on the global stage. Providing tax credits throughout the value chain make the goods cheaper. Also, a transparent tax system makes the country lucrative for international companies to set up operations here.

Also Read: Impact of GST on the FMCG Sector

The first year of GST has led to mixed results for the economy and the various sectors. The government has resolved most of the teething troubles while it still seeks recommendations and tweaks the framework. The impact of GST in the long term is expected to be positive with lower taxes and improvement in several parameters in 'Ease of Doing Business'.

If you have any queries regarding how GST impacts your business, feel free to contact us at http://www.webtel.in/.