Impact of Goods and Service Tax (GST) on Indian Economy

Dr. N.R. Das (Professor)

Jyoti Jethmalani (Honorary Faculty)
Institute for Excellence in Higher Education

Abstract
GST stands for Goods and Services Tax is proposed to be a comprehensive indirect tax levy on
manufacture, sale and consumption of goods as well as services at the national level.
GST is one of single biggest tax reform since independence. The central idea behind this form of
taxation is to replace existing levies like value-added tax, excise duty, service tax, and sales tax
by levying a comprehensive tax on the manufacture, sale and consumption of goods and services
in the country. GST is expected to unite the country economically as it will remove various forms
of taxes that are currently levied at different points. The general expectation from GST is that
there will be no tax on tax. There will be no cascading effect. So over a period of time, the prices
will stabilize and also there will be buoyancy in the GDP growth of the country.
This present paper focuses on explaining the concepts of Goods and service tax and its impact on
Indian economy. Then it highlights the benefits of GST and how it is better from present tax
structure.
Key Words- Goods and Service Tax, GST, Indian Economy, VAT, GDP

Introduction
Tax policies play an important role on the economy through their impact on both efficiency and
equity. A good tax system should keep in view issues of income distribution and, at the time, also
endeavor to generate tax revenues to support government expenditure on public services and
infrastructure development.

Goods and Service Tax (GST) is a comprehensive tax levy on manufacture, sale and
consumption of goods and service at a national level.
GST is a tax on goods and services with value addition at each stage having comprehensive and
continuous chain of set-of benefits from the producers/ service providers point up to the
retailers level where only the final consumer should bear the tax.
The main function of the GST is to transform India into a uniform market by breaking the current
fiscal barrier between states. Thus the GST will facilitate a uniform tax levied on goods and
services across the country.

Currently, the indirect tax system in India is complicated with overlapping taxes levied by the
Centre and the State separately.

Objectives of the study

To understand the concept of goods and service tax.

To learn about shortcomings of current taxation system in India.
To understand how GST will work in India.
To understand the benefits of GST over the current taxation system in India.
To know the impact of GST on Indian Economy and to different Sectors.

Research methodology
The study focuses on extensive study of Secondary data collected from various books, National
& international Journals, government reports, publications from various websites which focused
on various aspects of Goods and Service tax.

GST How It Works In India?

The GST system is based on the same concept as VAT. Here, set-off is available in respect of
taxes paid in the previous level against the GST charged at the time of sale. The GST model has
some aspects which are as follows:
Component: GST will be divided into two components, namely, Central Goods and Service Tax
and State Goods and Service
Applicability: GST will be applicable to all Goods and Services sold or provided in India,
except from the list of exempted goods which fall outside its purview.
Payment: GST will be charged and paid separately in case of Central and State level, Input Tax
Credit: The facility of Input Tax Credit at Central level will only be available in respect of
Central Goods and Service tax. In other words, the ITC of Central Goods and Service tax shall
not be allowed as a set-off against State Goods and Service tax and vice versa.
Proposed GST
Items
Total GST Rates (in %)
Centre
Goods
20
Services
16
Essential Goods
12
Presently it is (26.5%, CENVAT- 14% and State Vat-12.5%)

State
12
08
06

08
08
06

Present Tax Structure v/s GST

S.N

Particulars

Present Structure

GST (Expected)

o
1.

Broad scheme

There are separate laws

There will be only one

for separate levy. For

such law because GST

e.g. Central Excise Act,

shall subsume various

1944, respective State

taxes

VAT laws.
2.

Place of Taxation

Taxable at the place of sale of

It is consumption (destination)

goods or rendering of service

based tax

3.

4.

5.

Tax Rates

Cascading effect

Tax burden

There are separate rates. For

There will be one CGST rate

e.g. Excise 12.36 % and

and a uniform rate of SGST

Service Tax 14%.

This Problem arises because

across all states.

This situation will not arise as

credit of CST and many other

CST concept is being

taxes not allowed.

eliminated with introduction of

Under present scenario, tax

IGST.
Under this, tax burden is

burden on tax payer is high.

expected to reduce since all

taxes are integrated which
make it possible the burden to
be split equitably between

6.

Concurrent Power

At present, there is no such

manufacturing and services.

Both Centre and State are

power to both Centre and State

vested with the power to make

on same subject tax matter

law on GST by virtue of

proposed Article 246A of the

7.

8.

9.

10.

Compliance.

Tax compliance is complex

Constitution.
Tax compliance would be

Administration.

because of multiplicity of laws

easier as only one law

and their provisions to be

subsuming other taxes need to

Transparent Tax and

followed.
Presently, tax is levied at two

be followed.
GST is to be levied only at final

Administration

stages in broad manner i.e.

destination of consumption and

1. When product moves out of

not at various points. This

factory

brings more transparency and

2. At retail outlet

corruption free tax

Inter-State Transactions Goods & Services : Imposed by

administration.
To be subsumed in GST &

the Centre

subject to IGST

Powers to levy Tax on

As Excise Duty (CENVAT)

No such powers in GST

Manufacture

:Centre

11.

12.

Powers to levy Tax on

- Inter-State: Centre

Concurrent powers to Centre &

Sale of Goods

- Local: State

State

Powers to levy Tax on

Centre

Concurrent powers to Centre &

Provision of Services
13.

Tax on Import in India

State

Goods : Under Customs

Duty (comprises Basic
Customs Duty, CVD &

14.

Tax on Export of

SAD);
Services : Under

Basic Custom Duty on

goods : No Change;
CVD & SAD on import
of goods and import of
services : To be

Service Tax
Exempt/Zero-rated

subsumed in GST
No Change

Rs.1.5 crores

Rs. 10 lacs to Rs.20 lacs

Goods & Services

15.

Excise Duty
Threshold Limit

16.

VAT - Threshold Limit

Rs. 5 lacs to Rs.10 lacs

Rs. 10 lacs to Rs.20 lacs

17.

Service Tax -

Rs.10 lacs

Rs.10 lacs to Rs.20 lacs

VAT/GST Registration

Simple TIN (some States : PAN

PAN based number

Number

based)

Procedures for

CENVAT & Service Tax:

Collection of Tax and

Uniform

Threshold Limit
18.

19.

Will be uniform

Filing of Return
20.

Use of Computer

VAT : Vary from State to State

Network Just started by the

Extensive; It is necessity for

Network

States; very minimum

implementation of GST

Central Taxes to be Subsumed in GST

o
Central Excise Duty (CENVAT)
o

Additional Excise Duties

The Excise Duty levied under the

Medicinal

and

Toiletries

Service Tax

Additional Customs Duty, commonly

known as Countervailing Duty (CVD)

Surcharges and Cesses levied by Centre

are also likely to be subsumed wherever
they are in the nature of taxes on goods or
services. This may include cess on rubber,
tea, coffee, national calamity contingent
duty etc.

Central Sales Tax to be phased out.

Taxes not to be subsumed under GST

o

Basic Customs Duty

Exports Duty

Road & Passenger Tax

Toll Tax

Property Tax

Stamp Duty

Electricity Duty

Luxury tax

Taxes on lottery, betting and gambling

State Cesses and Surcharges in so far as

they relate to supply of goods and services

Special Additional Duty of Customs o

4% (SAD)

Entertainment tax (unless it is levied by

the local bodies)

Preparations o

(Excise Duties) Act 1955

State Taxes to be Subsumed in GST

o
VAT / Sales tax

Octroi and Entry Tax

Purchase Tax

Benefits of GTS System

Greater Tax Revenues: By doing away with large no. of taxes, GST will simplify the process of
tax collection, improve compliance and boost revenues.
No Cascading Effect: Being value added in nature i.e. tax levied at and only for every additional
stage of production, GST will do away with the burden of tax on tax.
Boost to Inter State Trade: By having one tax rate for each service/product, GST will create
national market.
Lower Inflation: A low GST rate with elimination of cascading effects will serve to bring down
prices of many products.
Higher Growth: Experts believe that combination of benefits mentioned above will result in
higher GDP Growth- as much as 1 to 2 % above the current growth rate.

Impact of GST on Indian Economy

The following are specific implications of GST on various stakeholders.

Impact to the Economy

Impact to the Corporate Sector
Impact to the Exporters
Impact to the Industry
Impact of GST on Consumers and businessmen
Impact of GST on Services
Impact of GST on Small Businesses and Unorganized sector
Impact of GST on Inflation Management
GDP Impact of GST on Make-in-India

Impact to the Economy

It will simplify India's tax structure, broaden the tax base, and create a common market across
states. This will lead to increased compliance and increase India's tax-to-gross domestic product
ratio. According to a report by the National Council of Applied Economic Research, GST is
expected to increase economic growth by between 0.9 per cent and 1.7 per cent. Exports are
expected to increase by between 3.2 per cent and 6.3 per cent, while imports will likely raise 2.44.7 per cent, the study found.
Impact to the Corporate Sector
It will be beneficial for India Inc. as the average tax burden on companies will fall. Reducing
production costs will make exporters more competitive.
Impact to the Exporters
The subsuming of major Central and State taxes in GST, complete and comprehensive setoff of
input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of
locally manufactured goods and services. This will increase the competitiveness of Indian goods
and services in the international market and give boost to Indian exports.
Impact to the Industry
Manufacturing sector in India is one of the highly taxed sectors in the world. A complex and high
taxation structure has the tendency to render products uncompetitive in the international market.
GST when enforced would eliminate complexities in the present taxation structure and
consequently prevent the loss of nearly 50% of the advantage of lower manufacturing costs that
India has over the western nations.
Impact of GST on Consumers and businessmen
The several types of taxes that currently exist such as excise, octroi, sales tax, CENVAT, Service
tax, turnover tax etc. would come under the GST umbrella. Since this would eliminate double
taxation, it might result into fall of prices; thus relieving consumers. This is because the GST
provides tax credit at every stage of taxation from manufacturing to consumption. Currently,
margin is added at every stage and tax is paid on the amount including margins. These taxes on

profit and taxes on tax add to the cost of goods and services whose burden is to be borne by the
final consumer.
For businesses, the GST would make life easy because of easier compliance (due to absence of
multiple taxes) and easier return filing, tax payment and refund process due to robust IT
infrastructure.
Impact of GST on Services
Currently, central government levies service tax for more than 100 services. No sales tax / VAT
are levied by the states on services. However, once GST is in place, the service providers would
need to pay the SGST to the states. Further, there will be a common tax rate on all services. This
implies that services might become costly when GST is in place.
Impact of GST on Small Businesses and Unorganized sector
The GST is not applicable until gross annual turnover crosses Rs. 10 Lakh. A few states, which
have lower VAT threshold, will be at loss and the Central Government promises to compensate
them. The GST is unlikely to benefit the unorganized sector because it would not get any tax
credit for purchases that it makes from organized sector. Further, if a business from unorganized
sector sells the goods to unorganized sector, it would not be able to pass on the benefits of setoff.
Due to this, it can be expected that unorganized sector might become less competitive and may
face decline. Any such decline might further aggravate the unemployment in the country.

Impact of GST on Inflation Management and GDP

The GST with its uniform taxation structure can be one of the most important steps towards
achieving the task of inflation management and GDP growth. The current indirect tax regime
suffers from significant cascading which leads to higher cost of goods and services consumed in
the country. Given that both Centre and State taxes would be levied simultaneously on all
supplies, the issue relating to dual taxation on certain products would also come to rest. The
reduction of costs in India would make our products more competitive in the international market
thereby not only increasing the GDP of the country but also inflow of foreign currency. There are
also estimates that GST can add 2% to GDP.

Impact of GST on Make-in-India

The Make in India campaign is proposes to make India a world-class manufacturing hub. The
tax reforms through GST will play a crucial role to attract large scale investment. The impending
Goods and Service Tax (GST) promises a progressive tax system which avoids tax cascades and
helps establish India as a true common market. GST will reduce the cost of production and
allows the hassle free supply of goods. This can increase the ease of doing business India.
Conclusion
GST would facilitate seamless movement across nation and will reduce the overall transactional
cost of running the business and thereby also reducing the compliance of following multiple tax
rules and obligations. This is highly relevant in todays time looking at the growth Indian
economy can achieve and to come alongside the other developing nations as it will reduce
corruption and bring more efficiency of running the businesses.
The political parties and all other groups concerned in the decision-making should do the needful
to implement the GST by 2016. Further delay in its implementation will be a lost opportunity in
terms of growth.

References
http://www.indirecttaxprofessionals.com/gst-positives-for-indian-economy/
http://taxguru.in/goods-and-service-tax/taxeshttp://caknowledge.in/difference-between-present-tax-structure-and-gst-structure/subsumedgst.html
http://articles.economictimes.indiatimes.com/2013-08-13/news/41374977_1_services-tax-stategst-goods-and-services/2
http://www.gktoday.in/blog/implications-of-gst-on-indian-economy/