It is common knowledge that an effective taxation system is a key to a country's economic growth and development. Taxes have played a significant role in the growth of the Gross Domestic Product (GDP) of every country as they are the primary source of revenue for governments. As taxes contribute to economic growth, they, in turn, raise the income level, standard of living and create job opportunities.
India is the world's second most populated country, sixth-largest economy by nominal GDP, and the third-largest economy by purchasing power parity. It can be said that the role of taxes and taxation systems in a country like India is immense. India has had various tax reforms over the years having direct and indirect taxes. Over the course of time, India has had several indirect taxes such as Service tax, Excise duty, Value Added Tax (VAT), Customs duty, etc.
SITUATION PRIOR TO THE INTRODUCTION OF GST
As per RBI data, the central and state governments had raised revenue worth ₹1662518 crores by a collection of indirect taxes in the fiscal year 2016-17. However, due to a large number of indirect taxes, citizens had to pay numerous taxes, due to which cases of tax evasion were heavily increasing which paved the way for black money and illegal transactions. This led to the introduction of the Goods and Services Tax (GST) on 1st July 2017 which transformed the Indian tax regime. GST is a multi-stage tax system that is levied on the sale of goods and services. It is applicable throughout India. The introduction of GST was driven by the belief of 'One nation, one tax'. It led to the abolition of all the existing indirect taxes with them being directly replaced by GST. There are four types of GST namely - CSGT, SGST (which are levied equally), IGST, and UTGST.
PROVISIONS IN GST
Abolishment of the existing tax regime and its replacement with GST was bound to impact the Indian economy and have positive as well as negative effects. The government decided to divide the economy into different slab rates. As per the socio-economic needs, certain everyday items like fruits, vegetables, milk, bread, flour, etc have been exempted from GST. The GST tax slabs start from 5% and go up to 28%, being reserved for the luxury goods and services such as ACs, refrigerators, automobiles, movie tickets, etc.
IMPACT ON ECONOMY
Looking at the brighter side, GST has several positive impacts on the country's economy. It has significantly reduced the tax burden on producers and fostered them to increase production and thereby the output has also increased. GST had a mostly favourable impact on the manufacturing sector. It has helped in bringing down costs as a large number of goods became significantly cheaper after the GST rollout which led to increased sales. India's manufacturing sector had grown by 13.5% in the quarter ending June 2018. This growth was a direct consequence of the GST rollout. Analysis of the index of industrial production data revealed that the industrial output of the manufacturing sector had seen a sharp growth since the implementation of GST. Growth in vehicle manufacturing IIP had been highest in six years.
GST has had a mixed impact on wholesalers and retailers as in the case of wholesalers the supply chain can be tracked online with GST due to which one simply cannot evade payments of taxes which was widely prevalent under the previous regime. However, for retailers, the impact has been mostly positive. The input tax credit facility and easy access to new markets have been the biggest advantages.
GST also impacted the real estate sector. The Real estate sector is the second-largest avenue of employment generation after the IT industry and contributes to around 7.8% of India's GDP. Implementation of GST has brought transparency in the functioning of this sector. Before its implementation, several taxes such as VAT, Service tax, registration charges, etc had to be paid by buyers but with the introduction of GST, buyers have to pay tax only on under-construction properties. A single tax rate of 12% is applicable. One doesn't need to pay GST on completed or ready-to-sell properties having a legitimate completion certificate. Due to a decrease in the sales of under-construction properties, the GST rates have been reduced by the government to revive the sector. The tax deduction limit on housing credit interest repayments has also been increased. Along with ready-to-move properties, GST is also exempted from resale properties. The builders/contractors have also benefited significantly from the implementation of GST as under the previous tax regime they had to bear Excise duty, VAT, Customs duty, etc on inputs or raw material and service tax on various input services. The input tax credit was also not available. The pricing would get impacted by all this and the burden was ultimately transferred to the buyers. However, under GST, the construction costs are reduced significantly as multiple taxes have been subsumed and also due to the availability of input tax credit.
Coming to the largest contributor of Indian GDP, the IT sector, the GST rate is a whopping 18%. While this must be troublesome for firms and businesses, they'll surely get relief in the form of increased sales and other factors such as the availability of input tax credit which would help in bringing down operational costs. Thus, the overall gains for the IT sector will definitely rise and benefit from the implementation of GST.
Another major player in the Indian economy is the agriculture sector which contributes to nearly 16% of the GDP. One of the positive impacts of GST is the reduction in transportation costs of agricultural products across all states which lowers the overall cost of producers. However, one limitation that arises is an increase in the costs of a few agricultural products due to a rise in the inflation index as the rate of taxation on certain products has increased under the new regime. Under the GST model, dairy farming, poultry farming, and stock breeding are excluded from the agriculture domain. So these are taxable under the GST regime. In the long run, GST will certainly have a favourable impact on this sector and provide farmers with the best prices for their products.
Small and medium enterprises (SMEs) also play in the total output generation of a country, especially in a country like India. Under the new tax regime, launching new businesses has become relatively easier as the registration process is uniform in all the states across the country and the taxation process has become much simpler. The cost of logistics has also been reduced. The distinction between goods and services has been eliminated as tax is levied on the final out and not on goods or services individually. Earlier, businesses with turnovers of ₹5-10 lakhs had to make payments for VAT. However, under the current regime businesses with an annual turnover of fewer than ₹20 lakhs are exempted from filing GST returns. This has a positive impact and provides a sense of motivation to small businesses and startups by relieving them of the tax burden. Since it is not a perfect world, there are some negative impacts of GST on SMEs as well. For instance, multiple registrations are required for pan India business and since they've to be done online, some businessmen might face difficulties. Returns have to be filed monthly which can prove to be a tedious job as under GST, there are around 36 returns that have to be filed in a fiscal year. Additionally, businesses functioning on e-commerce platforms have to file returns irrespective of their annual turnover.
Another key contributor to the Indian economy is the hospitality industry. Like every other sector, the hospitality industry too was liable to pay multiple taxes under the VAT regime. The process used to be tedious and rather costly. Under the GST regime, the hospitality industry has reaped benefits, particularly from the input tax credit. Ultimately, costs for Indian consumers have decreased.
It can be concluded that GST has had a vital impact on the Indian economy with positive as well as negative effects. There has been an increase in the revenue of the government after its implementation as indirect tax receipts increased from ₹8,66,167 crores (FY 2016-17) to ₹9,16,445 crores (FY 2017-18). While, it has been argued by many that GST is a flawed tax regime with several limitations, especially to small businesses, there has been a favourable effect on all the major contributors of GDP with the overall output increasing significantly which indirectly has an impact on the welfare of the country's citizens.