GST аnd thе Compеtitivеnеss of thе Indiаn Economy

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Published Date:  26-11-2023   Author:   moulik-jain
gst аnd thе compеtitivеnеss of thе indiаn economy

On July 1, 2017, India implemented the Goods and Services Tax (GST) to streamline the complicated tax structure, remove cascading taxes, extend the revenue base, improve compliance, and make business easier. GST’s influence on the Indian economy’s competitiveness, especially in foreign commerce, is a critical characteristic.

GST competitiveness refers to India’s ability to create and sell products and services at cheaper costs and higher quality than domestic and foreign competitors. GST competitiveness is determined by variables like productivity, innovation, infrastructure, human capital, and institutions.

GST competition has a huge influence on the Indian economy since it affects manufacturing costs and efficiency, product pricing and quality, as well as trade incentives and possibilities. We shall investigate how GST impacts India’s competitiveness by influencing exports and imports as well as the entire economy.

In terms of exports, GST eliminates cascading taxes, making Indian goods more inexpensive and competitive worldwide. The installation of the GST resulted in an increase in the pace of export growth. In terms of imports, GST reduces the cost of importing capital goods, allowing Indian businesses to modernize and increase production. 

Overall, GST benefits the Indian economy. GST unifies the domestic market by reducing inter-state trade obstacles, allowing for economies of scale. The simpler tax system decreases the burden of compliance and corruption. Transparent regulations and processes make conducting business easier. Thus, GST boosts India’s competitiveness and global trade status via a variety of avenues.

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GST’s Positive Impact on the Indian Economy

The introduction of the Goods and Services Tax (GST) in India has had a number of beneficial economic consequences. 

To start with, GST has simplified the formerly complex tax system by integrating many indirect taxes, such as excise, sales, and tax on services, into a single tax scheme. Firms’ regulatory and administrative duties have been reduced as a result. Under GST, there is no longer a need for multiple registrations, returns, and compliances across different states. Businesses now need to deal with only one tax with a few slabs, one administration, and one system of tax compliance.

Second, since it is based on the principle of tax on value addition, GST has decreased the cascading impact of taxes. Instead of charging the entire value of the good, tax is now only levied on the value added at each stage of the production chain. This has reduced the hidden tax burden on both producers and consumers. Studies estimate GST to reduce the tax burden on manufacturers by 25-30%.

Because of the centralized tax procedures, tight e-way bill standards, and the IT network, GST has enhanced compliance with tax laws. Small businesses and traders that used to do business in cash are now included in the formal economy. It has broadened the tax base and raised income. GST collections crossed Rs 1 lakh crore for the third month in a row in Jan 2020, indicating improved compliance.

Item Industry Before After
Biodiesel that is sold to the oil marketing companies Fuel 12% 5%
Granting of National Permit to goods carriages Logistics 18% Nil
‘Keytruda’ drug for the treatment of cancer Healthcare 12% 5%
Services on AFC Women’s Asia Cup Sports 18% Nil


Table: Top 4 items where GST has been reduced

GST has boosted inter-state trade by eliminating state barriers and entry taxes. Seamless input tax credits and the movement of goods across states have enabled the creation of a common national market. This has expanded business opportunities and aided the Make in India initiative.

Moreover, GST has enhanced the competitiveness of Indian products in international markets. Exports are nowadays zero-rated, and imports and exports are now faster due to reduced procedures. This has provided a boost to the export sector.

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Finally, owing to efficiency improvements, uniform taxes, and lower compliance costs, GST is predicted to increase GDP growth by 1-2%. NCAER estimates the long-term GDP effect of GST to be between 0.9 and 1.7 percent. As a result of tax simplification, lower tax burden, greater compliance, common market access, competitiveness in exports, and overall efficiency improvements, GST has had a favorable influence on the Indian economy.

The Adverse Effects of GST on the Indian Economy

The implementation of Goods and Services Tax (GST) in India has been a major tax reform, but it has also had some negative impacts on the Indian economy.

GST has resulted in significant income shortages for both the federal and state governments. Actual tax collections have consistently been lower than early forecasts due to decreased rates, deductions, tax evasion, and an economic slump. This has disrupted government finances and impacted budgetary allocations for development programs and welfare schemes. 

To compensate states for revenue losses, the central government had promised 14% annual growth in GST revenue for five years. However, even this compensation has not been fully met, leading to disputes between centers and states over GST revenue sharing.

GST has also created inflationary pressures in the economy. The increased tax burden on essential goods and services has impacted household budgets and consumption. Removal of exemptions and higher tax rates have increased costs for businesses, which have been passed on to consumers through higher prices. This has particularly affected lower-income groups who spend a greater share of income on essentials.

There has also been a differential sectoral impact. Export-oriented sectors like manufacturing, textiles, and leather have benefited from input tax credits, while sectors like real estate, healthcare, and small traders have been adversely affected due to higher compliance burdens and costs. Unorganized enterprises and small businesses have suffered from complex procedures, higher costs, and loss of informal supply chains. The agriculture sector continues to remain outside the GST ambit. This uneven impact has created distortions across economic sectors.

Thus, while GST has created a common market and eased inter-state movement of goods, its implementation has faced considerable challenges. Teething troubles in technology, frequent changes in rates and processes, revenue uncertainties, and sectoral impacts have created economic disruptions. Addressing these negatives through policy reforms, administrative streamlining, and effective IT systems can help realize the full potential benefits of GST for the economy.

GST Impаct on Indiаn Exports

Exports are crucial for India’s economy, generating foreign exchange earnings, employment, and economic growth. In 2019-20, India’s exports of goods and services totaled USD 493.2 billion, nearly 19% of GDP. However, India’s global export share remains low at around 2%. High logistics costs, complex regulations, and limited manufacturing success impede exports. The GST aims to boost export competitiveness by easing the tax burden and compliance process while leveling the playing field globally. 

Export Import
SEZ Basic Custom Duty
Export Duty Anti-Dumping Duty
Foreign Trade Policy Safeguard Duties


Table: Taxes that might not subsume after GST

The reforms seek to maximize exports’ potential to drive growth. However, India must continue to solve fundamental issues like infrastructure and trade obstacles. Targeted policies to support key export industries and streamline procedures can further boost overseas shipments. With strategic efforts, India can raise its export performance and integrate deeper into global value chains.

GST Impаct on Indiаn Imports

India relies heavily on imports to meet its requirements for essential commodities, industrial products, investment products, and consumer goods. In the year 2019-20, India’s imports were $598.6 billion, making up nearly 22.5% of GDP. Conversely, imports face high tariffs, non-tariff barriers, currency rate instability, and trade deficits. 

The GST, or Goods and Services Tax, adopted in 2017 is projected to have a variety of consequences on imports. GST has streamlined India’s complicated indirect tax system, perhaps facilitating imports. However, increasing GST rates on certain imported commodities might raise expenses for local enterprises.

Overall, GST aims to create a unified market, which could boost the competitiveness of Indian and foreign companies.

Conclusion

The adoption of GST has altered India’s indirect tax structure. This historic change has provided various advantages to exporters, including zero-rating exports, eliminating CVD and SAD, utilizing transaction value for valuation, and simplifying compliance. These policies have decreased the tax burden, improved cash flow, and increased the worldwide competitiveness of Indian exports. 

However, GST has had a detrimental influence on imports. Imports are taxable under GST rather than IGST, with different tax rates, and importers are unable to claim ITC on BCD, along with additional surcharges. This raises import costs and diminishes competitiveness. While GST has enhanced exports via simplicity and reduced taxes, the additional burden on imports is harmful. The overall impact on Indian economic competitiveness varies by commodity and service, but GST has been a turning point in the simplification of indirect taxes.

FAQs

  • How does the implementation of GST impact the Indian economy?

The introduction of GST has brought about a positive transformation in the Indian economy. By replacing numerous indirect taxes, it has simplified the tax structure, leading to enhanced compliance, a reduction in tax evasion, and an overall increase in government revenue.

  • How can MSMEs be supported under GST?

Some ways in which MSMEs can be supported under GST are – introducing a simple quarterly return filing system, increasing threshold exemption limit, organizing training programs for MSMEs to adapt to GST, providing incentives to MSMEs for compliance, rationalizing and reducing tax rates on goods commonly used by MSME sector, setting up a GST helpline to resolve issues faced by MSMEs.

  • Do businesses in India experience varying effects due to GST?

Indeed, the impact of GST differs among businesses based on their size and type. Larger enterprises benefit from reduced cascading taxes, whereas smaller businesses may initially face challenges in adapting. Nevertheless, the system as a whole promotes transparency and a more uniform tax structure.

  • What can be done to improve the GST compliance?

Using technology for quicker refunds and having strict penalties can improve compliance in India. One can also set up dedicated awareness programs to educate everyone on GST processes. 

  • Does GST present any challenges to the economy?

Yes, implementing GST does pave the way for certain issues. Businesses are required to adapt to this change while technologies must be ready to work towards new compliance. These can cause some problems in the implementation of GST. 

  • Does GST contribute to the growth of India economically?

GST contributes significantly to the economic growth of India. It improves efficiency and lowers the overall manufacturing costs. You can also get an easier movement of products and services among states.

  • How does GST impact Indian businesses?

GST has aided businesses in decreasing their tax compliance costs by implementing a simplified online registration and tax payment system. Because of fewer state border regulations, interstate delivery of commodities has become speedier. GST is predicted to have a good long-term effect by expanding the formal economy and tax collections.

  • How does GST affect the economy’s pricing levels?

GST implementation saw a slight increase in inflation. However, over the longer term, GST is expected to have an overall moderating impact on price levels. Removal of the cascading effect of taxes would bring down prices if the benefit is passed to consumers. A widening tax base and improved compliance would also add to downward pressure on prices. However, upside risks remain – like increasing GST rates at times of low revenue collections.

  • What are some of the challenges still faced in GST implementation?

Some challenges in GST implementation are – complex filing procedures, especially for SMEs, multiple returns filing requirements, delays in tax refunds affecting business cash flows, lack of robust compliance mechanism, frequent changes in tax structure impacting supply chains, technical glitches affecting filings, need for training tax administrators and educating businesses.

  • What is the road ahead for GST in India?

The road ahead for GST involves – expanding the tax base to more sectors like petrol, power, and real estate, simplifying tax slabs and rate structure, linking Aadhar with GST registration, improving compliance monitoring through invoice matching, enhancing the capacity of GST Network portal, coordination between center and states on rate rationalization, faster resolution on key issues like taxing cryptocurrencies, e-commerce transactions, etc.

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Moulik Jain

I am a seasoned marketer specializing in Tax, Finance, and MSMEs who brings a wealth of hands-on experience to demystify complex subjects, providing insightful guidance for entrepreneurs and finance enthusiasts alike.

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