A reform that dismantled all inter-state trade barriers and brought the entire country under a unified tax regime, the Goods and Services Tax has been a much awaited and much needed reform in the Indian taxation system. The Goods and Services Tax has successfully converted India into a unified market of over 1.3 Billion citizens, giving momentum to the country’s fiscal reform program and widening the economy.
The primary objective of the Government of India when implementing this Tax was to offer a win-win situation for the three parties involved in any trading transaction, i.e, the manufacturer/trader, the consumer and finally, the Government. The Goods and Services Tax aims to simplify the taxation regime for the manufacturers and traders by reducing the tax filings, easier bookkeeping and transparent rules. For the consumers, it means a reduction in the payment for goods and services that they purchase and for the Government, it means an increase in the revenues and a reduction in revenue leaks as they would be easily identifiable.
However, the intent and theory aside, the ground reality depends on the execution of this regime and it is important to analyse the impact of this.
The Impact of The Goods and Services Tax
This article analyses the impact of the Goods and Services Tax in two ways:
A. By considering its short term and long term effects; and
B. By considering its impact on specific areas and sectors.
A.1 The Short-term impact of the Goods and Services Tax
The consumer is at a disadvantage, if we are to consider the immediate effect of the GST regime, as he would now be compelled to pay higher taxes. Majority of everyday consumables now draw either the same or a higher tax.
In addition to this, the implementation of GST itself has a cost of compliance attached to it, which might be prohibitive for manufacturers and traders, especially those who function on a small scale. This might end up the goods being priced at a higher rate, resultantly discouraging the customers from purchasing the goods/services.
A.2 The Long-term impact of the Goods and Services Tax
GST entails a multitude of benefits including a lower rate of taxes and minimum tax slabs (in the long run). The GST would impact the macroeconomic indicators in a positive manner. Inflation would also be reduced as the infamous cascading effect of taxes would be eliminated.
It would also be highly beneficial for the Government as the expected revenue of the Government is likely to rise and the fiscal deficits are expected to be within the safe zone. The projections state that the Foreign Direct Investment (FDI) and the volume of exports would increase and there would also be an enhancement in the ‘Ease of Doing Business’.
B. Impact of the GST on Specific Areas and Sectors In addition to the GST simplifying the taxation system of the country, by reducing the cascading effect of taxes and making it easier to calculate tax at the various stages of the supply chain, the GST has also aided in fostering production in the country. The reduced burden of taxes has significantly increased the production and growth of numerous industries. As a result of lesser taxes on the retailers, goods are priced at relatively cheaper rates, thereby reducing the final cost to the consumer.
A key sector to consider in this discussion are the Small and Medium Enterprises (SME’s) who can now register under the Composition Scheme introduced by the Government. Under this scheme, the Small and Medium Enterprises are required to pay taxes only according to their annual turnover.
Further, pan-India operations can now be carried out smoothly as traders and manufacturers, who transport their goods from one state to another, can now avoid taxation roadblocks such as toll plazas or check posts. Earlier, due to these problems, the manufacturers had to keep large buffer stocks which ultimately resulted in an increased cost of storage and warehousing. The removal of such roadblocks means a reduction in such additional costs.
In addition to that, the export duty on goods has also been reduced under the new regime and so has the cost of production in the local markets. Both these circumstances combined have increased the net volume of exports in the country, resultantly businesses have become more competitive and expansive.
Owing to the simplification of taxes and reduction in their multiplicity, the aggregate number of taxpayers has visibly increased thereby generating greater revenues for the Indian Government. The rolling out of the Goods and Services Tax has made the administration of the tax regime easier and uncomplicated, both for the authorities as well as for the consumers. The Goods and Services Tax has aided the Indian organizations in establishing themselves globally as well.
Conclusion and Suggestions
This article gives a comprehensive analysis of the impact that the Goods and Services Tax has had on the Indian economy thus far. It can safely be concluded that even though the GST may have had a few drawbacks in the short term, it is definitely a welcome step in the long run. Now, it is up to the Government to effectively deal with the situations faced by the small-scale manufacturers, traders and other lesser endowed participants in the market. However, it is recommended that the compliance costs be lowered so as to ensure actual ‘compliance’ and necessary changes, as needed, be made to the current regime for the greater good of the country’s taxpayers. It will take our entire country to ensure the success of this new system and to truly achieve its
objectives.