Whether Implementation of GST is Boon or Bane to the economy

The goods and services tax (GST) was created to unify indirect tax applicable on most products and services in India. It was introduced as a replacement to several other taxes that were present in the country. GST was a measure to reduce the discrepancies and loopholes that existed with all the previous taxes.

The Goods and Services Tax (GST) is the most-talked about upcoming comprehensive indirect tax in our country subsuming the major indirect taxes like Customs duty, Excise duty, Service tax and Value Added Tax (VAT). Based on recent newspaper reports, one would realize that it has become so controversial that the opposition political parties are not supporting the same despite several attempts by the government in power. This non-cooperation explains the delay in passing the bill. One hopes that the bill gets nod of the parliament in the foreseeable future and becomes an Act and will become effective from the next fiscal. In my view, GST is simply the streamlining of various indirect taxes in order to avoid the effect of cascading so that the final cost to customer will go down.

What is GST?

GST is the common indirect tax applicable on most products and services we consume or use in our daily life. It is applied to the supply of goods and services.

GST was first introduced by the Indian government in 2017. To understand the impact of GST and to determine whether the policy change has been good or bad, it is essential to understand how things functioned before and after its implementation.

GST was first introduced in France in 1954. And there are currently almost 160 countries that have GSTs (with slight variations in their nature, scope, and applicability).
Most of the countries with GST systems are well-developed/fast developing countries.
Only Canada has a Dual GST system which has paved the way for Dual GST (CGST & SGST) in our country.
Being a technology-based and transparent tax structure, it will clarify things to be applied with equal value across the country.
In the initial stage, the idea of 5 different tax tables will facilitate the classification of goods and services.
Indirect tax issues will be resolved within a limited timeframe.
Generating more revenue will enable the government for more development work in all sectors of the country.

Before GST

Before the GST, we had VAT or ‘value added tax’, service tax, excise duty tax etc. VAT was introduced in 2005 by the Indian government with a similar intention to unify the Indian tax system. VAT is also a form of indirect tax. It was calculated on the basis of the value the product adds to the supply chain. It also considers the product’s price and takes in account previous tax added to the product.

VAT was not uniform across the country and varied from state to state, defeating its purpose. Every state had its own municipality, making it even more cumbersome to calculate taxes and even resulting in higher tax rates. There was also no reliable source to claim tax credits on services. One had to jump through hoops to get a simple thing done. Hence a uniform tax reform was introduced again, this time in the form of ‘GOODS AND SERVICE TAX’ also known as GST in the year 2017.

Working of GST

GST was brought into motion to:

achieve the ‘one nation, one tax’ goal
eliminate the avalanche of taxes and procedures
promote online procedures for tax payments and smoothen the workings of municipalities overall
reduce tax evasion
increase competitive prices and increase consumption

Benefits of GST implementation

The emergence of GST has completely replaced various indirect taxes at both the central and state levels (eg excise duty, service tax, value added tax, sales tax, luxury tax, entertainment tax, excise, and entry tax and many others).
The whole nation became a common market for trading.
Poor and underdeveloped states were given a chance for economic growth.
The huge growth in foreign direct investment.
Tax management has become simpler, more transparent, and simpler.
Reducing tax evasion and corruption
Completely removed the concept of cascading effects
Various tax rates (i.e. 0%, 5%, 12%, 18% and 28%) have been introduced for the convenience of manufacturers/service providers as well as consumers.
He completely and successfully eliminated various tax barriers between the center and the state.
A great increase in government revenue.
The number of taxpayers has increased significantly.
Positioned in the global ranking of “Ease of Doing Business”, India is becoming known as a perfect, profitable, and new destination for foreign investors.

Composition of GST

GST is made up of three components: the CGST, SGST and IGST. There are parts of GST that are levied upon transactions between states.

The CGST is the tax collected by the central government on sales within the state.

The SGST is the tax collectable by the state government on sales within the state.

The IGST is the tax collectable by the central government on sales outside the state, and transactions between states.

For example, if we were to purchase an electric motor vehicle within the same state, the tax applicable would only be 5 % (CGST & SGST) whereas if any goods from Kerala are sold to the state of Andhra Pradesh only a certain percentage of IGST is applicable (around 18% for goods).

Henceforth, the GST mode of tax payment and collections made a significant impact on products, reducing the amount of resources spent on the previous tax collections as well, making the procedure much more user friendly and also bringing about some degree of uniformity in the indirect tax department of India.

The taxes that have redirected or reduced into the GST taxes are :

Central Excise Duty
Duties of Excise
Additional Duties of Excise
Additional Duties of Customs
Special Additional Duty of Customs
Cess
State VAT
Central Sales Tax
Purchase Tax
Luxury Tax
Entertainment Tax
Entry Tax
Taxes on advertisements
Taxes on lotteries, betting, and gambling

Boon of GST Implementation

It’s nearly impossible to collect all indirect taxes due to that these taxes do not come under the GST spectrum and are added upon separately

Electric duty
Alcohol consumption
Toll tax
Property tax
Countervailing taxes

VAT at the state level was introduced in our country mainly to eradicate the cascading effect i.e. tax on tax which used to occur with sales tax. After the introduction of VAT, traders can claim input VAT against output VAT. But the main disadvantage of VAT is that it is levied after excise duty and service tax are levied and again causes a cascading effect. Hence, effective implementation of GST will help eradicate the cascading effect.
Instead of maintaining large records, returns, and reporting under various laws, all assessees will feel comfortable in GST as compliance costs will be reduced. It also simplifies the procedure for claiming the input tax rebate.
With full and seamless credit, manufacturers, or traders do not have to include taxes as part of their production costs, which is a very strong reason to say that we can see a reduction in prices. So GST leads to lower prices and helps price-sensitive consumers. However, if the government tries to introduce GST at a higher rate, it may be lost.
The export of goods/services will not be taxed under GST. So it is good for export-oriented businesses and Indian goods can comfortably compete in global competition as their prices will come down comparatively. This will lead to GDP growth as well as favorable BOP.
By merging all indirect taxes into one basket, the government will be able to cover every manufacturer, service provider, and seller who is not liable to tax earlier due to various exemptions under various laws. The simplified procedure also encourages traders to comply with tax rules and procedures.

Therefore, looking at the overall comparison between the VAT and the other pre-existing taxes and GST tax system, there is more support for states to be able to earn their share of income in a more fair method rather than a central government monopoly; it has also reduced the cascade of repetitive taxes of certain goods and has caused an overall reduction in prices of products for the general public.

The GST method of taxing is mentally and resourcefully slightly taxing, especially initially, for businesses. But at the same time, considering online tax portals, reduced steps in filing of taxes and reduced conversions overall is very beneficial to them in the long term.

The VAT system allowed taxes primarily on goods and the services were ignored; there was the concern of patents, software products, which could not be categorised and fell through the cracks. There were multiple grey areas.

The VAT system also did not allow fair distribution of taxes among states and the centre. It also did not have a practical methodology for input tax credits to be legitimised. The GST system addresses many of these issues and has systematically tackled major faults of our previous tax system

Bane of GST Implementation

VAT was first introduced in 1998, though it came into force in 2005. This type of delay can become a potential threat to GST as there are many changes between the formulation of the law and the actual implementation.
GST is a consumption tax. This has the effect of increasing the revenue of state governments where consumption is relatively high.
GST will truly benefit end consumers only if the formulated laws are followed and implemented both in letter and spirit.
A high rate of GST will cause even more problems for consumers than solving the existing problems. If different states opt for different SGST rates, the main purpose of introducing GST will be defeated.
The government does not give any guarantee that the prices of various goods and services will surely come down after the implementation of GST. Unless the government makes any rule or law, price increase or decrease is the prerogative of the seller/manufacturer/service provider.

Due to the government not setting up proper portals and infrastructure to handle the implementation of GST, a lot of issues have arised. The most important of these issues is the confusion that has arised amongst businesses since most business models were tuned to the existing VAT regime. This has ultimately caused the Business Confidence Index to drop too. Another disadvantage of GST has been the slowing down effect it has caused on the GDP. This has occurred due to business practices changing and the confusion related to GST existing in the minds of business owners.

Is GST a real boon for India?

Most of the developed/fast developing countries around the world are using it and so our nation is now on the same path.
Abundant revenue empowers the government to provide better social privileges, safety, protection, and other important services to its citizens so that they can lead a healthy, safe and enjoyable life.
The growth of foreign direct investment will bring a huge opportunity against unemployment and a lower global ranking.
The emergence of various advanced software makes calculations accurate and fast. Advanced technology in economic activities will make our country efficient in terms of global expansion. As of now here we can see how it will affect the Indian economy and move it in a positive direction as a developed country. Frankly, there is a real need to step up against the old tax regime at this point

On paper, the GST system sounds like a fairly impactful change in the tax policy, even though it may be true partially in terms of goods price reduction, convenience of tax filing and simplifying taxation. After almost five years of implementation, many major issues still remain. According to The Hindu, the GST system has undergone nearly 700 minor changes since its implementation.

It promised to boost the GDP and provide the much needed funds to state governments. The GDP has actually dropped since its implementation.. The central government only released partial funds to the state governments after the COVID-19 pandemic struck in 2020 and states were in desperate need of funds creating a huge debt of funds to be given to the state governments for the year 2020-21.

It is important to note here that implementing any major policy reform is tedious and time- consuming. Despite its slow results, the GST system appears to benefit the country in the long term.

It has increased uniformity in the system—not 100% yet, but inching towards that—it has also made product cost and tax differentiation more transparent. It has helped in achieving an effective tax credit system. If GST payments were not open to online transactions, the pandemic would have had a much more significant impact on the economy.

FAQs

Why was GST implemented?

GST was implemented to create a unified tax structure, eliminating the cascading effect of taxes, simplifying compliance, and creating a common national market.

How does GST work?

Under GST, taxes are levied at multiple stages of production and distribution, but the tax paid at the previous stage is available as a credit for the next stage. This ensures that the tax is levied only on the value addition at each stage.

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