Abstract
In India, there are two types of taxes – Direct and Indirect taxes. Direct taxes are taxes that are directly paid by the individual/citizen of the country to the government. Example: Income Tax. Indirect taxes are taxes which is paid by the individual/citizen of the country to the government indirectly. Examples: VAT, CST, Excise duty, Luxury tax, Entertainment tax, Sales tax etc. The old tax regime has been replaced by the new tax which was introduced in the year 2017 named GST. The old tax regime had several problems which were getting difficult for the people to follow and skipping of tax was happening regularly which was becoming a problem for the government. In past India was always on the go to introduce GST in the country, but due to various reasons, it had been postponed every time.
On 1st July 2017, the Government of India introduced GST through the 101 amendment of the constitution. It was introduced in a way that different taxes were all combined to form one uniform tax called GST. This research paper will shed light on GST, its introduction, and the impact of GST on the Indian Economy from the day it was introduced.
Keywords
GST, Indian Economy, Impact, Indirect tax, Government of India.
Introduction
During the British period, to bring treasury/money into the government, the then-British leaders introduced a tax system in India. From that day till today, taxation has been playing an important role in the Indian economy. The taxation system in India, even today is the laws made by the British government and they have never been changed except for amendments in particular laws depending upon the situation prevailing.
As times evolved, the tax was divided into two types. Direct and Indirect tax. The taxpayers have always been the persons carrying the burden of paying it both directly and indirectly. But in indirect tax, the burden is even higher than that of direct as there are cascading effects and double taxation that happens in indirect taxes. To eliminate such difficulties GST was introduced which will benefit the end consumer (i.e.) user of products and services.
GST was introduced through the 101 amendment of the constitution on July 1st, 2017, by the Indian government. GST is the short form for Goods and Service Tax. It is a single indirect tax imposed on the end consumer to reduce the burden of multiple indirect taxes along with other disadvantages of the old tax regime.
GST in India is divided into three categories – SGST; CGST; and IGST.
SGST – It is imposed on the state level by the state government on intra-state sales of goods and services.
CGST – It is imposed on the Center level by the central government on the inter-state sale of goods and services.
IGST – It is collected when the supply of products and services happens between one state with another state. IGST is collected by both the government (i.e.) State and Center.
Research Methodology
This paper is based on descriptive research and based on secondary data from journals, articles, newspapers, and the GST Act. Secondary data has been used extensively to receive information for this research paper.
Review of Literature
1. Newspaper – This research paper consists of matter derived from various newspapers which provided information about the impact of GST and what it did to the Indian economy. The information provided in the newspaper was after three or four years of implementation of the act so the impact which is discussed in the paper would be the impact of GST over years.
2. Journal Papers – This research paper also contains information derived from journals available on the internet. However, the information is used only for the understanding of GST, its implementation, its consequences, and its impact before and after its introduction.
3. Blogs – Certain blogs available on the internet like Ipleaders, Tax Guru, and Clear Tax helped me gain knowledge about the impact it created. This knowledge helped me understand the impact in a better way and helped me to research this topic in a better way.
4. GST Act – References about certain sections and rules have been taken from the act itself. The act was directly used so that, implementation and complications would be understood better.
Analysis
In India, indirect tax was first introduced in the year 1985 by implementing the MODVAT. Later discussions happened on VAT at the state level. After several discussions and the introduction of several rules, regulations, and laws VAT was introduced at both central and state levels simultaneously. In the year 2006, the then finance minister P. Chidambaram initiated GST. Due to a lack of adequate resources and full knowledge, it was not considered. But from that date, councils were being set up to implement GST. The council would gather all the information and make laws according to the needs of our country. In the year 2014 under the Bhartiya Janata Party (BJP) government, GST was set up under the 101 amendment of the constitution known as Goods and Service Tax.
GST is of two types – Unified and Dual system. Countries like Brazil and Canada adopted a Unified system (i.e.) single tax throughout the country, and India adopted a dual system (i.e.) taxes will be levied by both the center and state governments (1). When this act was introduced, it applied to the whole of India except Jammu and Kashmir (2)but on 8th July 2017, it was amended, and Jammu and Kashmir was also included.
All information regarding GST has been provided in the Act from Section 1 to Section 174. Under the GST Act, rules, regulations, and laws about the scope of supply, composition levy scheme, exemptions, ITC, registration details, returns, payment of tax, refunds, audits, etc. have been provided. These sections help businesses in our country to function effectively and improve our country’s position in the global market. Before we understand the impact of GST on the Indian economy, let us understand why GST has to be introduced in the first place.
Defects in the old indirect tax regime
1. In the old tax regime, there were taxes like customs duty, central excise duty, sales tax, special CVD, entertainment tax, luxury tax, VAT, etc. which were in complex nature and hit the small and medium enterprises mostly. Owing to such complexity, compliance was difficult, and corruption increased at an alarming rate.
2. In the old regime, along with the complicated nature of the tax, different types of taxes existed at once and it was not uniform throughout the country. The products and services were being taxed without any proper manner.
3. In the old regime, cascading effect and double taxation were taking place, and the burden fell on the end customer i.e., the consumer. The state and central government were levying taxes simultaneously and a chain reaction was created from the starting point to the end.
4. Lack of coordination between the central and state governments in levying taxes was visible and the taxes were high. Due to high tax rates, most of the people skipped paying taxes.
5. Lack of uniformity in applying taxes was also clearly visible among different states and industries in the economy. Every state and industry had a different rate, rules, and exemptions which created a lot of confusion among the consumers.
These are just a few examples and due to many such disadvantages, a need for a new tax arose and GST was introduced in the country. The motto with which it came into effect was “One nation, one market, and one tax” (3). GST replaced central excise duty, service tax, surcharge, cess, CVD, VAT, SAD, sales tax, luxury tax, and entertainment tax.
The concept of GST is that it is a value-added tax levied on the supply of goods or services. It is a continuous chain of tax credits from the producer’s point up to the consumer’s point. The supplier at each level is permitted to avail GST on the purchase of goods/services. He can also set off his credit against the payment made on the supply of goods and services. Since tax on tax and cascading effect is eliminated only value added at each stage is taxed.
The act also provided the framework of the act. There is a portal called GST common portal where all the services including the filing of returns, clearance of queries, etc. are provided in one place so that the people would not face any problems. While all goods and services are under GST, there are certain exceptions provided for some goods and services under the act which do not come under GST till an official gazette notification is released by the central government on recommendations of the GST council.
Now that we understand GST and its reasons for implementation let us look into the impact it created on the Indian economy both positive and negative.
Positive Impact –
1. The introduction of GST simplified the complex tax system and made the tax calculations simpler. It also gives the taxpayer a clear idea of how much he is paying as tax to the government.
2. Since the tax amount paid by the taxpayer has been reduced, the saved amount if pumped back effectively as funds will increase the production of business.
3. Unlike the old regime, GST is paid based on the turnover in the preceding year and the size of the organization provided they are registered under the composition scheme under the act in the given procedure. This scheme has greatly benefitted the small and medium enterprises in our country.
4. Customs duty from the old regime has been eliminated, thus saving money from the export of goods from our country. Since money is being saved, many people are coming forward for exports which in turn helped in increasing the exports of the country.
5. Since GST is a single tax system, businesses can be run in any state without any disturbances, thus paving the way for enhanced business operations.
6. As already known, GST eliminates cascading effects and double taxation.
Along with the above impacts, there are more positive effects (4) of the implementation of GST:
a. Unified national market
b. Boost to make in India initiative.
c. Ease of doing business
d. Benefits to industry, trade, and agriculture
e. Reduction in compliance costs
f. Automated procedures with the use of IT
g. Certainty in tax administration.
h. Enhanced investment and employment opportunities.
Like every coin has two sides, along with positive effects there are certain negative effects of GST:
1. Even though the old tax regime is replaced, just like the old regime even in GST the ultimate burden falls on the end customer (i.e.) the consumer.
2. Prices of certain goods and services have been increased leading to inflation making it difficult for middle and lower-middle-class people to survive.
3. Even firms are facing issues with the ITC system which is failing to manage working capital requirements effectively.
4. The unemployment rate has been increased from 3.39% to 6.06% during July 2017 to February 2018.
5. The real estate market has been affected by GST. The commercial property increased to 18% and residential property is 5%. Even though real estate took all the advantages out of GST, issues like implementation and compliance delays are causing the overall cost to be increased which is increasing the GST percentage.
6. The tax levied on sanitary pads is 18% and is one of the biggest criticisms as pads are a necessity for every woman and levying high taxes on such products is not acceptable.
7. Air ticket prices have also been increased as the tax levied has increased from 9% in the old regime to 18% under GST making travel a luxury expense.
8. Under GST service sector tax rates have been increased to 18% making it costlier to afford certain services.
9. Prices of luxury items have also been increased due to an increase in the tax rate under GST.
10. 2,30,000 small businesses shut down due to the complications raised
Even though there are negative impacts of GST on the Indian economy, the positive effects of GST are more on the Indian economy. It is a path-breaking indirect tax reform that is introduced in our country to create a unified taxation system. According to a survey conducted and published in newspapers by economists, GST in India is currently at:
According to an article on July 3rd, 2023, in The Economics Times, there was an increase from 63.9 lakhs in 2017 to approximately 1.40 crores currently. (6)
According to India Today paper there is a year-on-year increase of 12 percent. (7)
In one of its articles, the Hindustan Times stated that “The new indirect tax regime that was launched in July 2017, has now undoubtedly matured; and the sustained buoyancy on the tax on the consumption for 12 consecutive months despite global headwinds undercovers the resilience of the Indian economy”. (8)
The Economic Times stated that research conducted by the World Bank Group for the Ease of Doing Business Index in which paying taxes is an important parameter India has significantly improved from 100 in 2018 to 77 in 2019 and 63 in 2020. (6)
Conclusion
GST is not a new concept. It was introduced in the year 1954 in France. One by one many countries like Australia, New Zealand, Canada, South Korea, Nigeria, Germany, Brazil, Singapore, India, and many countries implemented. It is a digitalized form of VAT and destination-based tax. It is divided into five slab rates – 0%; 5%; 12%; 18%; and 28%. After the implementation of GST all products and services fall under any one of the slab rates. However certain products like petroleum products, alcoholic drinks, and electricity do not fall under the category of GST. They will fall under GST when the central government releases a notification in the official gazette on the recommendations of the GST council.
GST was already in full swing in other countries but due to a lack of proper knowledge and resources, India delayed its implementation. When it was introduced, there were some discrepancies and it had a negative impact on the Indian economy, small and medium enterprises struggled to understand all the rules and regulations. Since it was new even the government made some mistakes. Individuals/ citizens also took their time in understanding the concept of GST.
But as time passed, people; small and medium enterprises; government got familiar with the concept of GST, and all the discrepancies faced were slowly removed. Today when we look into the current situation of the Indian economy, we can tell that the introduction of GST is one of the best decisions taken by the government of India. It is believed that the introduction of GST has put us on equal par with 140 different countries.
GST is a unified tax system that brings the entire nation under one tax system. This along with helping the entrepreneurs and businesses in the country of different states, also paved the way for the global market. With a unified tax structure, it is easier to enter into the international market and prove ourselves. It paved the way for modernization in the economy by changing the old regime to a new one. It can make the economy more enhanced, simple, and transparent.
References
(1) Module 1, The Institute of Chartered Accountants of India, Taxation (Edition: August 2021) (Pg No: 1.7 & 1.8)
(2) https://www.gstzen.in/wp-content/uploads/2021/02/cgst-act-2017.pdf
(3) https://static.pib.gov.in/WriteReadData/userfiles/GST%20E.pdf
(4) Module 1, The Institute of Chartered Accountants of India, Taxation (Edition: August 2021) (Pg No: 1.27 & 1.28 & 1.29)
(5) https://static.pib.gov.in/WriteReadData/userfiles/GST%20E.pdf
(6) Gunjan Prabhakaran and Pratik Shah, 5 years of GST: A mix of success and work in progress, Economics Times, June 30, 2022
(7) Koustav Das, Decoded: Impact of Higher GST Collection on Indian Economy, India Today, July 3rd, 2023.
(8) Shishir Gupta, High GST collection reveals robustness of Indian economy, Hindustan Times, April 02, 2023
(9) Blogs – ipleaders; clear tax, tax guru
https://cleartax.in/s/impact-of-gst-on-indian-economy
https://taxguru.in/goods-and-service-tax/gst-impact-indian-economy.html
K. Lakshmi Manasa
Keshav Memorial College of Law (Hyderabad)