GST and Its Impact on GDP

The Indian government expected that implementing a single taxation system—Goods and Services Tax (GST—would significantly boost the nation's Gross Domestic Product (GDP). This uniformed tax regime has brought the Indian economy closer to a unified market, enabling the free flow of capital and services and facilitating easier business operations.

In this article, we talk about GST and its impact on GDP of India in more detail. Read along!  

GST act and its impact on GDP

Before 2017, Indians had to bear multiple indirect taxes for various transactions, including purchases, sales, manufacturing, retailing, and marketing. The taxes included Value Added Tax (VAT), excise duty, service tax, central sales tax, entertainment tax, and luxury tax.

However, the implementation of GST combined these taxes into one, while these changes eliminated the cascading effect of indirect and double taxation, it had a significant impact on India’s GDP. This move helped establish a more unified market where capital and services could flow freely, thereby simplifying the business environment.

GST was instrumental in creating new reforms across the country such as e-way bills, and e-invoicing:

• e-Way bills were established under GST to ensure the smooth movement of commodities across state borders. These bills allow for more efficient tracking and monitoring of goods, decreasing tax evasion and improving compliance.
• e-Invoicing is an electronic invoicing system that tries to standardise and automate invoice generation and reporting. It involves the digital exchange of invoices between firms and tax authorities, thereby minimising manual processes and reducing errors. 
• While not directly related to GST, FastTag enables cashless transactions by collecting toll electronically. It minimises highway congestion, and improves overall transportation efficiency.
• Linking of e-way bills with government portals  such as VAHAN portal involved connecting the two platforms for exchange of information on real-time. This allows authorities to cross-check the information provided in e-way bills against other papers and databases, increasing the effectiveness of tax enforcement and ensuring compliance.
• Various indirect taxes were merged to make a single unified tax structure — GST. This streamlined tax administration, decreased compliance challenges, and minimised the cascading effect of multiple taxes, resulting in a more efficient and transparent tax regime.
• Digitisation of processes boosted efficiency and transparency of taxation processes. Taxpayers could register online, eliminating the need for physical submissions and reducing paperwork. Additionally, electronic filing of tax returns made it more convenient for businesses to comply with tax obligations, as they could submit returns digitally without the hassle of manual paperwork.

But what was the impact of the GST regime on the GDP rate of India? Let’s see how GDP fared post-GST implementation: 

As evident, the GDP growth rate fluctuated in the initial years following the GST implementation. The GDP growth rate continued to show positive trends post-implementation in July 2017, and as GST rates settled and businesses adjusted to the new tax regime, the trend continued. 

However, the growth slowed in 2018 due to various variables, such as global economic uncertainty and domestic concerns.

In the following quarters, the GDP fluctuated, showing both positive and negative trends . Notably, the April—June 2020 quarter experienced a huge contraction of -23.9%, owing mostly to the COVID-19 pandemic and consequent statewide lockdown.

However, the GDP growth rate took a rebound as the economy gradually started recovering. The April–June 2021 quarter saw a 20.1% growth rate, which showed the GST’s positive impact on GDP.

However, the following few months of 2021, saw a fallen rate to 8.4% and 4.1%. We again saw improvement in the April-June 2022 quarter but couldn’t sustain it as global economies suffered.

Conclusion

A few studies estimate that India's GDP rate will reach around 6.4% in the year ending March 31, 2024. However, it is projected to rebound and reach 6.7% in FY2024. The growth will be primarily driven by private consumption and private investment, supported by government initiatives to enhance transport infrastructure, logistics, and the overall business environment.

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