impact of gst

Impact of GST on the Indian Economy

Last Update Date : October 03, 2018

impact of gst on the indian economy

The secret of change is to focus all your energy, not on fighting the old, but on building the new. Likewise, in past few years, there had been a lot of changes made in the Indian Economy. But we also need to change the way we look at our economy. There are a lot of things we don’t measure well.

On 1st July 2017, GST came in to the picture in the Indian Economy under Prime Minister Narendra Modi’s Government. GST is defined as Goods and Service Tax, which was a replacement to existing indirect taxes like excise duty, Service Tax, VAT, etc. It will be levied all over India on the supply of goods and services. In this guide we will be examining its impact on various sectors across the country.

When was GST Launched in India?

On 1st July 2017 at midnight, the President of India, Sir Pranab Mukherjee and Prime Minister Sir Narendra Modi launched GST all over India including Jammu & Kashmir. However, there have been many changes made to the rates of GST, the latest being on 18th January 2018.

In a short span of time, all the states approved their State GST (SGST) laws. Union territories with legislatures, i.e., Delhi and Puducherry, have adopted the SGST Act and the other 5 union territories without legislatures have adopted the UTGST Act.

The idea of introducing GST was first proposed by the then Union Finance Minister, P. Chidambaram in his Budget for 2006-07. The discussion on GST took specific decision with the introduction of the Constitutional Bill (122nd Amendment), 2014. The Bill was passed by the Parliament on 8 August 2016. This was followed by the approval of the Bill by more than 15 states. On 12 April 2017, the Central Government enacted four GST bills:

  • Central GST (CGST) Bill
  • Integrated GST (IGST) Bill
  • Union Territory GST (UTGST) Bill
  • The GST (Compensation to States) Bill

Why was GST Introduced in India?

In the Indian economy, the service sector contributes to over 55%. Separate taxation of goods and services is neither viable nor desirable. GST in India had been introduced to reduce the tax burden that’s on both companies and consumers. In the previous system, there were multiple taxes added at each stage of the supply chain, without taking credit for taxes paid at previous stages. As a result, the end cost of the product does not clearly show the actual cost of the product and how much tax was applied. The tax structure was complex. GST integrated most of the taxes into one single tax, where the consumers are benefited. This method provides Input Tax credit paid on the purchase of goods and services, which can be offset with the tax to be paid on the supply of goods and services. As a result, this reduces the overall cost, with the end customer paying less.

Impact of GST on Indian Economy

GST is a game-changing reform for the Indian Economy, as it will bring the net appropriate price of the goods and services. The various factors that have impacted Indian economy are:

  1. Increases competitiveness
    The retail price of the manufactured goods and services in India reveals that the total tax component is around 25-30% of the cost of the product. After implementation of GST, the prices have gone down, as the burden of paying taxes has been reduced to the final consumer of such goods and services. There is a scope to increase production, hence, competition increases.
  2. Simple Tax Structure
    Calculation of taxes under GST is simpler. Instead of multiple taxation under different stages of supply chain, GST is a one single tax. This saves money and time.
  3. Economic Union of India
    There is freedom of transportation of goods and services from one state to another after GST. Goods can be easily transported all over the country, which is a benefit to all businesses. This encourages increase in production and for businesses to focus on PAN-India operations.
  4. Uniform Tax Regime
    GST being a single tax, it has made it easier for the taxpayer to pay taxes uniformly. Previously, there used to be multiple taxes at every stage of supply chain, where the taxpayer would get confused, which a disadvantage.
  5. Greater Tax Revenues
    A simpler tax structure can bring about greater compliance, this increases the number of tax payers and in turn the tax revenues collected for the government. By simplifying structures, GST would encourage compliance, which is also expected to widen the tax base.
  6. Increase in Exports
    There has been a fall in the cost of production in the domestic market after the introduction of GST, which is a positive influence to increase the competitiveness towards the international market.

Benefits and Challenges to GST

Benefits

  • Removal of multiple taxation.
  • Removal of cascading tax effect, i.e. tax on tax.
  • Increase in the production of goods and services
  • Increase in the demand and supply of goods and services.
  • Due to lower burden of taxes, there is a reduction in overall costs.
  • Burden has been decreased on the final tax payer, i.e. Consumer at the end.
  • Control over the circulation of black money as the system normally followed by traders and shopkeepers will be put to a mandatory check.
    Revenue of the government increased by extended tax base.

Challenges

  • Impact on pricing of goods and services due to subsumed taxes.
  • To keep a check on the rates of GST. If the rates of GST are over 15%, then the goods would be costlier.
  • There are still a few states in India which lack IT Infrastructure.
  • A separate law must be drafted.
  • Transfer of goods from one state to other all over the country. Continuation of specific exemptions on central GST and state GST.
  • Constitutional amendments to enable GST to central and state governments.
  • Constitutional amendments to enable levy of GST on imports.

Impact of GST on Different Sectors

  1. Consumer Goods & Services
    The GST rates for the FMCG industry is set at 18-20%.  While most are happy with the introduction of GST, the ones who are heavily affected are opposed.
  2. Transportation
    The rates for cabs has been lowered to 5% and for air travel also.  So, this is a welcome move for those in this sector.
  3. E-Commerce
    Post GST, e-commerce operators collect 1% of the net value of the taxable supplies, which is called Tax Collected at Source (TCS).
  4. Entertainment & Hospitality Sector
    This sector was affected as this sector falls in the 28% category.  Movie tickets, hotel rates will now be costlier.
  5. Financial Products and Services
    The, financial services such as funds and insurances, (Non-Banking Financial Company) are most impacted.
  6. Start-Ups
    GST has a positive influence towards start-ups. It had got both advantages and disadvantages for start-ups. However, as a start-up, already facing the stress of a new business, the question of how the new GST will impact your business, must be difficult for you.
  7. Inflation and Economic Activity
    GST is a Inflationary measure. However, the rise in the tax rate on services to 18% is expected to raise inflation.
  8. Stock Transfer
    Post the introduction of GST, tax is levied on branch transfers and input tax can be claimed later.
  9. Export of Goods & Services
    At all stages of the supply chain there is no tax, post GST. Moreover, the availability of input credits is welcomed.
  10. Gold and Gold Jewellery Prices
    Post GST the tax rate was set to 18% initially then brought down to 5% tax rate
  11. Rent
    Since the implementation of GST the exemption limit for renting out commercial property is Rs. 20 lakhs and there is not GST on house rent.
  12. SEZ
    Under GST regime, SEZ’s have benefitted from a zero-tax rate.
  13. Affordable Housing
    Purchase of houses is non-taxable, however under construction house will carry a GST tax rate. The GST rates for homes purchased under CLSS, EWS, LIG, MIG1/11 will be 8%, after deducting cost of land. However, those doesn’t qualify CLSS, etc, will have to pay 12% GST on constructed houses.
  14. Real Estate Sector
    This sector has mostly benefitted from the introduction of GST, as much of this sector is becoming more transparent.
  15. Logistics
    The rate pre-GST was above 26% and post the implementation of GST there was reduction to 18-21%, which was good news for the sector.
  16. Manufacturing Industry
    GST, demands businesses to set-up mechanism for meeting the requirements of GST. Therefore, once the companies adapt the requirements, the compliance costs will go down drastically.
  17. Automobile Industry
    GST absorbed indirect tax regime, which attracted several duties and taxes on the sale of vehicles and spares and accessories.
  18. Chemical Industry
    Implementation of GST is believed to be positive to the chemical industry, especially in the long term.
  19. Tobacco Industry
    The new GST rates are less than the combined taxes during pre-GST regime.
  20. Stainless Steel Industry
    GST had made a very good impact on steel industry. After issuing new tax rates, it has become more favourable to steel industry. The GST rate for primary steel industries is imposed at 18%, which is helpful for them to grow.
  21. Textile Industry
    Despite some changes under the GST regime, the textile sector benefitted with the implementation of the regime.
  22. Coal Sector
    After the GST implementation, the coal transportation rates have done down to 5% through trains, and thus the logistics costs has been decreased.
  23. Power Sector
    Overall impact of GST on power sector is positive. Domestic coal, is in the 5% tax slab. The impact of GST will be positive for the electrical and the lighting sectors as the rate is now 18%.
  24. Exports
    In the pre-GST tax system, import of the goods carried several import duties, however, after GST, IGST has replaced the indirect taxes that was earlier imposed on import of goods and services.
  25. Domestic appliances and Electrical Machinery
    There is not a huge impact in this industry as the new GST rates around 25%, which is similar to the rates pre-GST.
  26. Job works
    Special provisions exist for removal of goods for job-work and receiving back goods after processing from the job-worker carry no GST. The benefit of these provisions is extended both to the principal and the job-worker.
  27. Various segments of Indian Railways
    The impact of GST in this sector is very minimal as the rate is kept at the lowest tax rate of 5% to ensure passengers benefit the most.
  28. Hospitality Industry
    This is another industry that has benefited as the previous tax regime levied up to 27% tax. Post GST, the tax rates have been reduced.
  29. Aviation Sector
    The industry has mixed feelings about the introduction of GST, especially the GST rates for airline fuel.
  30. Pharmaceutical Industry
    This industry will see an increase in costs after GST implementation as the cost of medicines will rise by 2.3% in the 12% bracket and medicines with 5% will see no increase in MRP.
  31. Cement Industry
    GST will not affect this industry drastically, the tax rates imposed will get absorbed in the cost of cement production.
  32. Digital Advertising Industry
    This industry which is fast growing, is a cheaper method for companies as GST will have less effect in this sector, as compared to traditional marketing.
  33. Sweet makers
    They are trying to figure out if they need to pay 28% tax on it as many of our chocolate variations have more than 5% cocoa content. Badam milk, basundi and rasmalai are also a concern as we aren’t sure if they are sweets (5% tax) or beverages (12% tax).
  34. Handicraft Sector
    One of the largest sector of the country, which is most affected by GST. Therefore, GST is not welcomed by the artisans.
  35. Alcohol Industry
    There is no GST on alcohol, instead there is an increase in the price of alcohol. Price of a beer is going to raise by 15% and wine and other hard drinks will be increasing by 4%.

Impact of GST on a Short term

Before the implementation of GST, consumers paid more for goods and services, however, everyday consumables saw no major change in rates. The main drawback is on the small and medium enterprises, who will incur costs in trying to become GST compliant, which may result in higher prices of goods.

How H&R Block Can Help You?

GST impact can be either good or bad. Fortunately it’s has been good till now and is expected to have a positive impact in the long term. For your queries relating to the issuance of challans and all other GST related queries including registration, compliance and reconciliation, enlist the aid of the experts at earlyGST by H&R Block. India.