Did India’s most significant tax change meet its goals? The Goods and Services Tax (GST), introduced in 2017 as a major shift, aimed to make taxes simpler, speed up economic growth and make it easier to run a business. But did this big change meet what people hoped for? This article examines the impact of GST on India’s GDP, discussing its successes, challenges, and the road ahead.
Goods and Services Tax (GST)
Goods and Services Tax (GST) is a complete tax levied on the supply of goods and services within India.
The GST Act, passed by the Indian Parliament in 2017, set up the rules for using GST throughout the country. This legislation replaced multiple indirect taxes with a single, unified tax system.
The concept of a nationwide Goods and Services Tax (GST) in India started in 2000. After a lot of discussions and solving many legal problems, the GST Act was finally made into law in 2017. This important law changed the many indirect taxes into one simple tax system.
The GST wants to make a smooth and efficient tax system all over the country, helping the economy grow and develop.
Need for Goods and Services Tax:
- Simpler tax structure
- Eliminates cascading effects of the tax
- Increased revenue
- Technology-driven system
Types of Goods and Services Tax (GST)
There are four main types of GST in India:
- CGST (Central Goods and Services Tax)
- SGST (State Goods and Services Tax)
- IGST (Integrated Goods and Services Tax)
- UTGST (Union Territory Goods and Services Tax)
Pre-GST Scenario: Challenges in India’s Indirect Tax Regime
Before GST, India’s indirect tax regime was plagued by numerous challenges. A complex web of taxes, including Central Excise Duty, Service Tax, Value Added Tax (VAT), and Central Sales Tax (CST), created a fragmented and inefficient system.
This multiplicity of taxes led to cascading effects, where taxes were levied at each stage of production and distribution, increasing the final cost of goods and services. Furthermore, the varying tax rates and regulations across states hindered the free flow of goods and services within the country, impacting businesses and consumers.
The pre-GST system also presented significant challenges for businesses, including complex compliance procedures, increased administrative burdens, and a higher risk of tax evasion.
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GST Replaced the Following Central Taxes
- Service Tax
- Duties of Excise
- Central Excise Duties
- Cess and Supercharge
- Additional Duties of Excise
- Additional Duty of Customs
GST Services also Subsumed the Following State Taxes
- Entry Tax
- Purchase Tax
- Luxury Tax
- State VAT
- Central Sales Tax
- Entertainment and Amusement Tax
- Taxes on Advertisements
- State cess and Surcharges
- Taxes on gambling and Lottery
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Impact of the GST Act on India’s GDP
The Goods and Services Tax (GST) was designed to simplify India’s indirect tax system, remove the problem of taxes on taxes, and help the economy grow. Although its full effects over time are still being seen, here’s a quick overview based on the information we have so far:
- Initial Growth- Following GST implementation, India witnessed significant economic growth, with GDP figures consistently exceeding expectations in the initial quarters.
- Q1 FY24: 7.8% growth
- Q2 FY24: 7.6% growth
- Q3 FY24: 8.4% growth
- Q4 FY24: 7.8% growth
- Recent Slowdown: However, recent quarters have shown a slight slowdown in growth:
- Q1 FY25: 6.7% growth
- Q2 FY25: 5.4% growth
- Factors Influencing Growth:
- GST has contributed to improved logistics, increased tax compliance, and enhanced ease of doing business.
- Increased costs for some goods, challenges for small businesses, and initial economic disruptions have also been observed.
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GDP Growth Rates (Quarterly)
- FY21:
- Q1: -24.4%
- Q2: 7.4%
- Q3: 5.4%
- Q4: 4.1%
- FY22:
- Q1: 20.1%
- Q2: 8.4%
- Q3: 6.3%
- Q4: 4.1%
- FY23:
- Q1: 13.5%
- Q2: 6.3%
- Q3: 4.4%
- Q4: 6.1%
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Indirect Taxes Contribution
| Year | Indirect Taxes as a % of GDP | Indirect Taxes as a % of GTR |
| 2014 | 4.38 | 43.67 |
| 2015 | 4.36 | 43.87 |
| 2016 | 5.23 | 48.77 |
| 2017 | 5.68 | 50.24 |
| 2018 | 5.45 | 47.59 |
| 2019 | 4.96 | 45.23 |
| 2020 | 4.71 | 47.65 |
Positive Impact of GST on GDP of India’s Economy
- Eliminated cascading tax effects, lowering the overall tax burden on businesses and consumers.
- Streamlined inter-state movement of goods, reducing logistical challenges and transportation costs.
- Tax transparency increases and accountability leads to increased tax revenue for the government.
- Facilitated easier movement of goods and services across the country, fostering economic growth and development.
- Simplified tax procedures and reduced compliance costs, making it easier for businesses to operate in India.
- Improved tax collection efficiency, enabling the government to increase spending on infrastructure and social programs.
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Negative Impact of GST on GDP of India’s Economy
- Higher GST rates on certain goods and services have led to increased prices for consumers.
- Navigating the complexities of GST compliance, including filing returns and claiming input tax credits, can be challenging for small businesses.
- The initial implementation of GST caused some disruptions in the economy, including temporary shortages of goods and increased working capital requirements for businesses.
- Businesses have faced challenges in claiming input tax credits, leading to cash flow problems and increased costs.
- The impact of GST on India’s GDP has varied across different sectors of the economy, with some sectors experiencing greater challenges than others.
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GST Policies
| 1 | Multiple Tax Slabs | Goods and services are categorized into different tax slabs (5%, 12%, 18%, and 28%) with some items exempt or taxed at concessional rates. |
| 2 | Input Tax Credit (ITC) | Allows businesses to claim credit for taxes paid on inputs used in the production or supply of goods and services, reducing the overall tax burden. |
| 3 | Composition Scheme | A simplified tax regime for small businesses with limited turnover, allowing them to pay a fixed percentage of their turnover as tax. |
| 4 | Reverse Charge Mechanism (RCM) | In certain cases, the recipient of goods or services is liable to pay GST, particularly for supplies from unregistered suppliers. |
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Government Initiatives
GST Council: A constitutional body comprising representatives from the Central and State governments, responsible for key decisions related to GST rates, exemptions, and other crucial aspects.
GSTN (Goods and Services Tax Network): An IT backbone for GST, facilitating online registration, filing of returns, and other related processes.
E-Invoicing- Mandates the generation of electronic invoices for businesses exceeding a certain threshold, improving tax compliance and reducing paperwork.
GSTN Portal: An online platform for taxpayers to interact with the GST system, file returns, make payments, and access various services.
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