IMPACT OF GST ON INDIAN ECONOMY

Much has been already said about the implementation of the Goods and Services Tax (GST)
in India and its possible implications on the status quo. This article is an attempt at evaluating
the economic impact of redesigning the existing tax structure and moving on to GST that
looks to replace all indirect taxes with a single tax rate as a means to simplifying the tax
levying process for the Indian government. The central idea behind GST is to shift the tax
mix from income based to consumption based. It is a comprehensive tax levy on
manufacture, sale and consumption of goods and services at national level. GST is a part of
proposed tax reforms in India having an extensive base that instigate the applicability of an
efficient and harmonized consumption tax system. GST is commonly accepted by world and
more than 140 countries have acknowledge the same.
The present structure of taxation entails the levy of a number of indirect taxes on businesses
and individuals. These include the following:

Central Excise Duty

Service Tax

Sales Tax

Value Added Tax

Securities Transaction Tax

A number of problems arise in this, firstly that of double taxation on the producers and
manufacturers and the consequent tax evasion techniques employed by them to escape paying
out large amounts of their profits to the government the result of which was considerable
decline in the tax revenues for the government and a less-than-optimal production of goods in
an economy but a GST tax stands to eliminate the above through a single tax aimed at
establishing a national market. So the GST has two components:-One levied by Centre
(hereinafter referred to as Central GST) and The other levied by the States
(hereinafter referred as State GST).

CGST
SGST
This is applicable in the case of In case of sale of goods Intra-state

InterState
sale
of
goods
and
provision of service
Taxes/Duties covered under CGST
Central exercise duty
Service Tax
CVD, SAD
Excise duty on M and TP etc.

then tax will be charged as per this form.

Taxes/Duties covered under SGST

Entry Tax
Entertainment Tax
VAT/Sales Tax
Luxury Tax

Integrated GST (IGST)

The scope of IGST Model is that centre would levy IGST which would be CGST
plus SGST on all inter-state transactions of taxable goods and services with
appropriate provision for consignment or stock transfer of goods and services.
IGST will be combination of CGST and SGST and the same will be collected by the Centre
in the Origin State.
TAX CREDIT MECHANISM

S o u r c e : Ta x G u r u

T i m e b o u n d r e f u n d of credit will be allowed in cases such as exports and

inverted duty structure. It is clear that cross utilization of CGST and SGST is not
allowed generally but the IGST mechanism will make this credit fungible.
A very important implication of GST is that it would reduce tax burden on producers and
foster growth through more production. Manufacturing is a costly business under the current
taxation system where a producer has to pay taxes not only on raw material procurement, but
also on the final receipts from sale of goods. This double taxation prevents manufacturers
from producing to their optimum capacity and retards growth. GST, on the other hand, would
take care of this problem by providing tax credit to the manufacturer. Basically, the tax
already paid by him will be deducted from his final sale tax receipts and he would only have
to pay the difference, i.e. for the value added to the product by him. Also, due to absence of

tax credits applicability for interstate transactions, a manufacturer producing in one state has
to pay taxes on sale of those goods in other states as well. This adds to their cost and leads to
lower productivity. The various tax barriers such as check posts and toll plazas lead to a lot of
wastage for perishable items being transported, a loss that translated into major costs through
higher need of buffer stocks and warehousing costs as well. A single taxation system could
eliminate this roadblock for them.
A single taxation on producers would also translate into a lower final selling price for the
consumer. Currently, for a customer, the tax burden of goods in anywhere between 25-30 per
cent while GST proposes a tax rate of 18 per cent in the first year of implementation and
would be brought down over the second year and in later years. The consumer would not
only be able to purchase more goods with the same amount of money, he would also look to
buy more, thereby spurring market demand. Also, there will be more transparency in the
system as the customers would know exactly how much taxes they are being charged and on
what base.
GST would add to government revenues by widening the tax base. Until now, services had
been exempted from taxes. GST, however, brings them under the purview of taxation as well.
This would eliminate tax evasion by corporations that escape taxes by bundling their goods
along with services or whose products fall on the borderline of a good and a service, such as
software products. Also, GST provides credits for the taxes paid by producers earlier in the
goods/services chain. This would encourage these producers to buy raw material from
different registered dealers. This would bring in more and more vendors and suppliers under
the purview of taxation and reduce the ambiguity of the existing unorganised sector.
According to the National Council of Applied Economic Research study conducted in 2009,
the GST could provide gains in Indias GDP in a range of 0.9 to 1.7 per cent over the years
starting from its implementation, assuming the revenue-neutral rate to be anywhere in the
range of 6.2 and 9.4 per cent. The revenue neutral rate is the net difference in the overall
collection of centre and states (the idea is that if implemented, GST could lead to tax revenue
losses in some states. In such a situation, the central government would be compensating
them for the same for the next 5 years). Additionally, GST is also expected to exclude state
excise on alcohol and tobacco from its purview. This implies that a large revenue source still
rests with the state government to generate cash flows from.

Current Macroeconomic Indicators of India

Source: Trading Economics

GST also removes the custom duties applicable on exports. This has major implications for
the Indian economy: making exports tax-free would spur trade for our economy. Our
competitiveness in foreign markets would increase on account of lower cost of transaction
while the imports will be taxed same as domestic goods and services. If we look at the simple
aggregate demand equation of macroeconomic theory:
AD = C+ I + G + (X-M)
Where AD = Aggregate demand in the economy
C = Consumption demand in an economy
I = Investment demand in an economy
G =Governments spending on goods in an economy
X = Exports by a nation
M = Imports by a nation
On account of GST, the exports and imports are expected to increase by 3.2 6.3 per cent and
2.4 4.7 per cent respectively (source: aforementioned NCAER report). This would add to
the aggregate demand for goods in our economy. With unutilized capacity existent in India,
this would foster growth by encouraging production.
The concept of GST is more streamlined towards a longer term perspective but does
involve some short term challenges which will have to be overcome, such as that of the
administrative costs that would have to be borne in coming up with an administrative system

for GST and for working out the transitional agreements. Additionally, the tax proposal still
faces opposition from states who are unwilling to give up control on their tax revenue
sources. Given the different tax structure prevalent in all states, the negotiations over GST
seem to hit a roadblock every time over the transition of the local tax system so as to integrate
it with a national one. However, once implemented, the system holds great promise in terms
of bolstering growth for the India economy while bringing it more in line with the tax system
followed internationally.

Effects of GST:
Cost Benefit
In the current Tax scenario credit of surcharge, VAT, ACD is not available which increases
cost. With the introductionof GST credit of these taxes is available with cascading
effect which will help in reduction in cost. From the above example is will clear that
Tax Payable in GST is less than Current Situation.
Stock Transfer
Another important aspect is stock transfer. Because in GST, tax will be levied on the
dispatch. Every dispatch will betaxable under GST, so at every stage i.e. factory, warehouse
etc. registration is necessary.
Place of Supply
The main challenge in introducing GST is defining the place of supply in respect
of certain services. In existing tax regime it is not a problem as Service Tax is chargeable
by Centre only. But in GST place of supply has to be definedclearly to avoid dispute
among states and in case of inter-state transaction.
Place of Taxation Inter-State Transactions
An important question in the context of the Dual GST is whether these rules for international
cross-border suppliescan be adopted for domestic inter-state supplies also. It is
recognized that the place where the supplier or therecipient is established cannot
be defined uniquely at the sub-national level within a common market.
Positive impact on Indian economy

Speeds up economic union of India

Better compliance and revenue buoyancy Replacing the cascading effect

[tax on tax] created by existing indirect taxes Tax incidence for consumers

may fall Lower transaction cost for final consumers

by merging all levies on goods and services into one, GST acquires a very

simple and transparent character

Uniformity in tax regime with only one or two tax rates across the supply
chain as against multiple tax structure as of present

Increased tax collections due to wide coverage of goods and services

Improvement in cost competitiveness of goods and services in the

international market

CONCLUSION: In the first place, the macroeconomic impact of a change to

the introduction of the GST is significant in terms of growth effects, price
effects, current account effects and the effect on the budget balance. Secondly, in
a highly developed open economy with a high and growing service sector, a
change in the tax mix from income to consumption-based taxes is likely to
provide a fruitful source of revenue. Thirdly, the aggregate consumer price
impact of the introduction of the GST in India on the macro-economy was both
limited and temporary. Finally, despite falling outside the limited focus of this
short note, we should record that some impact has also occurred in the
administrative component of the compliance cost of the GST as well as a likely
increase in tax revenue from the underground or black economy. The task of
fiscal consolidation for this government will not be easy. There will be little
scope to cut overall expenditure, as it has already been trimmed sharply in the
last 2 years. The government must instead focus on switching expenditure from
unproductive subsidies towards spending on sector such as health, education and
infrastructure. The only way to reduce fiscal deficit, therefore, is to raise revenues as a share
of GDP. To do so, the government must implement structural tax reforms such as
GST, improve tax compliance and widen tax coverage. The scope to lower fiscal
deficit in fiscal 2015 is limited given large roll-over of subsidies from last fiscal
and little possibilities of implementation of GST within this year. Beyond that, however,
implementation of GST could facilitate much needed correction in fiscal deficit. In the
base case, it is believed that partial GST one that exclude petroleum goods is most

likely. Even with this, fiscal deficit could correct to 3.3% of GDP by fiscal 2017. On the
downside, a complete failure to implement GST would result in the fiscal deficit
being higher at around 4-4.2% in fiscal 2016-2017.