Impact of GST on the Indian Economy

GST is the biggest tax reform in India and founded on the notion of “one nation, one market, one tax”, dismantling all inter-state barriers with respect to trade. The GST rollout, with a single stroke, converted India into a unified market of 1.4 billion citizens. The rollout renewed hopes of India’s fiscal reform programme regaining momentum and widening the economy. 

The idea behind implementing GST across the country in 28 states and 8 Union Territories is that it would offer a win-win situation for everyone. Manufacturers and traders would benefit from fewer tax filings, transparent rules, a seamless flow of tax credits, and easier bookkeeping. Consumers would be paying less for goods and services, and the government would generate more revenue as revenue leakages would be plugged. Ground realities, as we all know, vary. So, how has GST really impacted India? Let’s take a look.

The Pre-GST Tax System in India

To grasp GST's significance, we must examine the complex system it replaced. Before GST, India operated under a maze of indirect taxes – Excise Duty, Service Tax, VAT, Central Sales Tax, and others – administered separately by the Central and state governments. Consider a business conducting interstate sales: they encountered multiple tax obligations at different jurisdictional levels, creating substantial tax burdens. This complicated web generated cascading taxes, essentially "tax on tax," where consumers ultimately paid inflated prices due to layered taxation. For example, taxes paid under under Excise Duty (paid on manufacturing) could not be claimed under VAT (paid on sales).

Understanding this historical context helps appreciate the revolutionary changes GST introduced, streamlining India's entire taxation framework into a more manageable, transparent system, with a free flow of input tax credits.

How GST Has Benefited the Indian Economy

The transformation to GST marked a pivotal shift in India's tax landscape. By implementing a single, transparent structure nationwide, both enterprises and consumers gained unprecedented visibility into their tax obligations. This revolutionary change brought several significant advantages to the Indian economy:

1. Simplified Tax Structure: The transition from multiple systems to a unified framework has streamlined compliance procedures. Businesses no longer navigate multiple tax regimes, making it considerably easier for them to meet their obligations while reducing the administrative burden.
2. Boosted Tax Compliance: Digital implementation of GST, including online submissions and electronic documentation, has significantly reduced tax avoidance. Rising compliance rates have enhanced government revenue collection, creating a more robust economic foundation.
3. Ease of Doing Business: The elimination of diverse state tax regulations has enabled seamless interstate operations. This improvement has elevated India's appeal to both domestic and foreign enterprises, fostering a more competitive business environment.
4. Formalisation of the Economy: The system encourages small enterprise registration, strengthening economic data collection and improving tax revenue generation. This shift toward formalisation has created a more transparent and accountable business ecosystem.
5. Reduced Cascading Effect: The elimination of multiple taxation layers has helped moderate prices for numerous products, benefiting both businesses and consumers in the long run.

Drawbacks of GST on the Indian Economy

Despite its advantages, the implementation of GST has faced several significant challenges that impact various sectors of the economy:

1. High Compliance Costs for Small Businesses: Many smaller enterprises struggle with meeting GST compliance requirements, facing increased operational expenses for compliance management. The frequent requirements, along with complicated input tax credit laws, have added considerable overheads to their operations.
2. Higher Taxes on Certain Goods: Several products, particularly in the luxury segment, experienced tax rate increases under GST, elevating their consumer prices. This adjustment has affected both businesses and end consumers in specific market segments.
3. Challenges for SMEs: Small and medium enterprises face ongoing difficulties managing the costs of adapting to digital systems and online filing norms. Many struggle with the technical requirements and financial burdens of the new system.

The Long-Term Economic Impact of GST in India

From a broader perspective, GST implementation promises enhanced productivity and global competitiveness for India. Increased formal sector participation provides the government with expanded revenue opportunities. Consequently, economic data accuracy has improved, while businesses face reduced interstate operational barriers. These improvements in logistics and administrative efficiency support long-term GDP growth, strengthening India's global market position.

How GST Impacts the Consumer Price Index (CPI)

The initial GST rollout created temporary inflationary pressure on the Consumer Price Index as businesses adjusted operations. However, eliminating cascading taxation has gradually reduced inflationary trends in certain sectors. Improved interstate logistics has decreased CPI volatility, offering consumers more stable pricing. The impact varies by sector, but overall volatility reduction benefits consumers through more predictable prices.

Impact of GST on the Common Man

For average citizens, GST implementation presents mixed outcomes in daily life. Essential items and frequently used products fall under lower tax brackets or receive exemptions, protecting typical households from excessive taxation. However, luxury segment goods face higher rates, increasing their retail prices. GST's transparent structure enables consumers to clearly understand their tax obligations, fostering system-wide trust and understanding.

What the Future Looks Like

Talking about the long-term benefits, it is expected that GST would not just mean a lower rate of taxes, but also minimum tax slabs. Countries where the Goods and Service Tax has helped in reforming the economy, apply only 2 or 3 rates – one being the mean rate, a lower rate for essential commodities, and a higher tax rate for the luxurious commodities.

Currently, in India, we have 4 major slabs, i.e. 5%, 12%, 18% and 28%, with certain goods like precious metals attracting special tax rates. Further, the GST collected is of 3 types – integrated tax (IGST), central tax (CGST), and a state tax (SGST), depending on whether the transaction is interstate or intrastate. In addition to this, cess is also levied. The fear of losing out on revenue has kept the government from gambling on fewer or lower rates. We are very unlikely to see a shift soon; though the government has said that rates may be revisited once the RNR (revenue neutral rate) is reached. 

Summing Up

As a priority, it is up to the government to address the capacity building amongst the lesser-endowed participants, such as small-scale manufacturers and traders. Ways have to be found for lowering the overall compliance cost, and necessary changes may have to be made for the good of the masses. GST will become good and simple, only when the entire country works as a whole towards making it successful.