Impact of GST on Economy

Impact of GST on Economy

What is GST ?

• The Goods and Services Tax Bill or GST Bill, formally known as The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014, suggests a national Value added Tax to be implemented in India from April 2016.
•  It was introduced in Lok Sabha on December 19, 2014 by Finance Minister Arun Jaitley.
• GST is an indirect tax on manufacture, sale and consumption of goods and services all over India and it will replace taxes implemented by the Central and State governments. It would be levied and collected at each stage of sale or purchase of goods or services based on the input tax credit metho.
• According to this method, GST-registered businesses can claim tax credit to the amount of GST they paid on purchase of goods or services as share of their normal commercial activity. 
• According to the bill GST council would be established GST Council, which will be tasked with optimising tax collection for merchandises and services by the State and Centre. The Council will involve the Union Finance Minister (as Chairman), the Union Minister of State in charge of revenue, and the Minister in charge of Finance or Taxation or any other, nominated by each State government.
•  This body will decide that, which taxes levied by the Centre, States and local bodies will go into the GST; which goods and services will be related to GST; and the basis and the rates at which GST will be applied.
• GST boosts an balanced tax structure that is neutral to business processes, business models, organization structure, product substitutes and geographical locations.   

Need for GST :

To understand the need of GST, we first need to understand the concept of – cascading effect of taxes, also soundly referred to as “taxes on taxes”. It is easy to show – say A offers merchandise to B in the wake of charging sales tax, and afterward B re-offers those products to C in the wake of charging sales tax. While B was figuring his sales tax obligation, he additionally incorporated the sales tax paid on past buy, which is the means by which it turns into a tax on tax. This was the case with the sales tax few years earlier. At that time, a VAT system was introduced whereby every next stage trader used to get credit of the tax paid at earlier stage against his tax obligation. This reduced an overall liability of many traders and also assisted to decrease inflationary impact this had on the prices.

                                

Similar concept arose in the obligation on manufacture – The Central Excise Duty – much before it arose for sales tax. The CENVAT credit structure (earlier known as MODVAT) was also a welcome change by trade and industry where the credit of excise duty paid at the input stage was permitted to be set-off against the obligation of excise on elimination of goods. With effect from 2004, this system was stretched to Service Tax also. Furthermore, cross utilisation of credit between excise duty and service tax was also allowed. To a huge degree, the problem of cascading effect of taxes is resolved by these measures.

Excise duty and service tax are levied by the Central Government, while the VAT is imposed by the State Government, which is a reason why such a cross-utilisation of credits between VAT and Excise duty was not allowed.

This is the table showing the present scenario of Indirect taxes that are being levied by the central and the state government.

The GST shall incorporate all the above taxes, excluding the Basic Customs Duty that will continue to be charged even after the introduction of GST. Further indirect taxes, such as stamp duty etc shall also continue. India shall adopt a Dual GST model, meaning that GST would be managed together by the Central and the State Governments.

The Dual GST Model consists of:

       

SGST – State GST, collected by the State Govt.

CGST – Central GST, collected by the Central Govt.

IGST – Integrated GST, collected by the Central Govt.

Advantages of GST

There are several advantages of introducing GST in India:

• Reduction in prices: Due to full credit, manufacturers do not have to include taxes as a part of their cost of production, due to this we can say that there is  a reduction in prices. However, if the government introduces GST with a higher rate, this might be lost.
• Increase in Government Revenues:  The government may wish to introduce GST at a Revenue Neutral Rate, in which case the revenues might not see a major increase in the short run but in the long run surely their revenue will increase.
• Less compliance and procedural cost: Instead of maintaining big records, returns and reporting under various different acts, all assesses will find comfortable under GST, as the compliance cost will be reduced. It should be prominent that the assesses are, nevertheless, required to keep record of CGST, SGST and IGST separately.
• Move towards a Unified GST: Globally, the GST is always desired in a unified form (that is, one single GST for the whole nation, as an alternative to the dual GST format). Although India is embracing Dual GST looking into the federal structure, it is still a good move towards a Unified GST which is considered as the best method of Indirect Taxes.
• The concept of warehouse changes when GST is presented. In the current tax system, a ware house is required for each state. If the dealer and ware house are in diverse states, then the dealer is required to pay a Central Sales Tax of about 2%. This grows the price of the commodity. Thus the companies use to setup a warehouse in each state. In GST as the CST gets removed, the number of warehouses can get reduced.
• Improvement in cost competitiveness of goods and services in the international market.

Disadvantages :

• GST is a regressive tax, which has a higher effect on low income recipients, meaning that the tax consumes a higher amount of their income, compared to those earning large incomes.

• India has opted for a dual-GST model. It can be seen that CGST, SGST and IGST are nothing but new names for Central Excise/Service Tax, VAT and CST and therefore GST brings nothing different to the table. 

Points to take care about :

The GST is a very good type of tax. However, for the successful implementation of the same, we must take care of certain relevant points. Following are some of the things that must be kept in mind about GST:

Firstly, it is really essential that all the states implement the GST together and at the same rates. Otherwise, it will be really burdensome for businesses to fulfil with the provisions of the law. Further, GST will be very beneficial if the rates are same, because in that situation taxes will not be a cause in investment location choices, and people will be able to concentrate on profitability.

• For even functioning, it is essential that the GST openly sets out the taxable event. 
•  The GST is a destination based tax, not the source one. In such situations, it should be clearly detectable as to where the goods are going. This will be difficult in case of services, because it is not easy to recognize where a service is provided, thus this should be properly dealt with.

Impact

In the first place, the macroeconomic impact of 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 developing service sector, a change in the tax from income to consumption-based, taxes is likely to provide a profitable source of revenue.

The task of fiscal consolidation for government will not be easy. There will be little opportunity to cut overall expenditure, as it has already been dropped sharply in the last 2 years. The government must in its place concentrate on changing consumption from ineffective subsidies towards spending on parts, for example, wellbeing, education and infrastructure. The best way to decrease monetary shortage, along these lines, is to raise incomes as an offer of GDP. To do as such, the administration must levy structural tax reforms, for example, GST, enhance charge consistence and broaden the expense scope.

“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 a much needed correction in fiscal deficit. In the base case, it is believed that partial GST – one that excludes 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.” This statement was given by Mr Arun Jaitley.

Service tax rate at present is 14% and it applies to nearly all services other than necessary ones such as ambulance services, cultural activities, few pilgrimages, sporting events, among others. If GST is carried out, this rate will rise (given the anticipation that GST will be 18-22%) making services more expensive. Investment management and insurance premiums, which entice a service tax currently, will also become costlier with the higher rate of GST.

Conclusion :

Presently, a lot of speculations are going as to when the GST will essentially be applicable in India. Considering into the political situation of India, it appears that a little more time will be required to ensure that everybody is pleased. The states are confused as to whether the GST will create hindrance in their revenues. State governments still not have agreement on following taxes to be subsumed in GST: Purchase tax, Octroi duty, Tax on alcoholic beverages, Tax on petroleum products & Tax on tobacco items. Although the Central Government has guaranteed the states about compensation in case the revenue falls down, still some mistrust can be a severe drawback. The bill is now stuck in the Rajya Sabha, as the present government does not hold a majority here.

References:

1. http://www.pradhanmantriyojana.in/gst-bill-explained-what-is-it-benefits-pdf-latest-news/
2. http://www.gstindia.com/gst-merits-demerits-goods-services-tax-explained/
3. http://qz.com/317108/the-complete-guide-to-understanding-indias-biggest-tax-reform-the-gst/

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About The Author

This report has been prepared and drafted by Abhishek Gulyani while edited and published by Aakash Raval , both pursuing MBA from Institute of Management, Nirma University located in Ahmedabad, India.

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