How Has GST Impacted the Indian Tax System?

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With a pressing need for improved financial structures and the desperate call for a more streamlined taxing system, GST garnered significant popularity among Indian citizens. GST, short for Goods and Services Tax, stands to be a vital aspect of the entire taxing landscape, bringing down the impact of indirect taxes.

The largest tax reform in Indian history, known as the GST tax system, which is based on the idea of “one nation, one market, one tax,” is now operative in full power. With the implementation of the largest indirect tax regime ever, all trade obstacles between states have been eliminated.

GST—Features, Advantages & Disadvantages

India follows a federal structure of tax system that comprises two categories. Direct tax and indirect tax. Direct taxes are levied against the assessed and must be paid by the assesses themselves because their burden cannot be transferred to another party.

Conversely, an indirect tax is one that is imposed on one party, but it keeps moving up the production/supply chain to different parties until it is ultimately borne by the final consumer. Whether or not the hopes overcome uncertainty will depend on how our administration approaches the goal of making the GST a “good and simple tax.”

The reason behind enacting the Goods and Services Tax (GST) in 29 states and 7 Union Territories is that it will create a mutually beneficial condition for all. Consumers would pay less for the goods and services, manufacturers and traders would benefit from fewer tax files, clear regulations, and simple bookkeeping, and the government would gain more income as revenue leaks would be sealed.

Benefits and drawbacks are inevitable with any reform. In this section, we will go over both the advantages and disadvantages of GST:

Benefits of the GST

  • Service providers were exempt from paying service tax if their annual revenue was less than Rs 10 lakh. Nevertheless, the GST tax system has increased the cap to Rs 20 lakh (earlier yearly revenue was more than Rs 5 lakh) and had to pay VAT, providing a large number of small business owners and service providers exemption from paying taxes.
  • The GST impact on small firms (with a turnover of between 20 and 75 lakh rupees) is positive because it offers the chance to reduce taxes through the composition plan under the GST scheme.
  • The whole GST process is completed online and is reasonably easy, from registration to filing returns. The option to register for GST online has been helpful, especially for start-ups, as it saves them from having to go through various registration processes for different taxes, such as service tax, VAT, and excise tax.
  • Under GST, only a single consolidated return needs to be filed. Consequently, the number of returns that must be filed has decreased.
  • It was well known that before the GST tax system was put into effect, several Indian businesses, including the construction and textile sectors, were mostly unorganized and chaotic. Nevertheless, there are provisions for electronic filing and payment in addition to the requirement to claim input credit only once the supplier has authorized the payment. As a result, these companies are now subject to more oversight and accountability.

Read More: Benefits of Registering for GST

Drawbacks of GST

  • Businesses must either buy GST software or update their current accounting or ERP software to one that complies with the GST tax system in order to continue operating. In the meantime, both options result in increased costs for the acquisition of software and staff training for the effective use of the new billing software.
  • Digital record-keeping guidelines must be followed, invoices that abide by GST laws must be created, and timely returns must be filed in order to avoid penalties for non-compliance with the GST by small and medium-sized industries. SMEs could still find it challenging to understand the nuances of the GST tax structure.
  • Businesses will now need to hire tax professionals in order to be GST-compliant, as the GST tax system is changing the way taxes are paid. Small businesses’ expenses will progressively increase as a result of the additional cost of hiring professionals.
  • Unlike in the past, businesses are now moving from paper-based invoicing and filing to online tax filing and payment. It may be difficult for some smaller enterprises to adapt to this.

Read More: Drawbacks Of GST: The Shortfalls You Need To Know

Impact of GST on the Indian Economy
captainbiz impact of gst on the indian economy

From the consumer’s perspective, the majority of the goods and services they use would suddenly require them to pay higher taxes. Most ordinary consumables are now subject to the same tax rate, or a little higher one. Moreover, there is a compliance cost associated with the adoption of the GST tax system. The expense of compliance appears to be excessive and burdensome for small-scale traders and producers, who have also voiced their opposition to it. They might decide to charge more for their products in the end.

In terms of long-term advantages, it is anticipated that GST will result in minimum tax slabs as well as lower tax rates. Only two or three rates are used in nations where the goods and services tax has assisted in economic reform: the mean rate, a lower rate for necessities, and a higher tax rate for luxuries.

There are currently five slabs and three rates in India: an integrated rate, a central rate, and a state rate. Cess is additionally imposed in addition to these. The government has refrained from taking a chance on fewer or cheaper rates out of fear of losing out on revenue.

The GST tax system will most likely have a positive medium-term impact on macroeconomic indexes. The elimination of the cascading (tax on tax) impact of taxes would result in a decrease in inflation.

Leaders in the industry believe that the biggest tax reform in the history of the country will help the nation become a more business-friendly environment, as an increase in exports would coincide with a rise in FDI (Foreign Direct Investment), and the fiscal deficit should remain under control.

Also Read: How To Do GST Registration Online

GST’s Positive Impact on India’s Economy 

Previously, India imposed a number of indirect taxes at various stages. As a result, the tax system became complex, and businesses were required to comply with numerous tax requirements. The GST, as a single tax applied to a wide range of products and services, has simplified the country’s tax system.

  • Increase output to lessen the tax burden on manufacturers and companies.
  • The many tax obstacles are eliminated by a single tax system.
  • Following the introduction of the GST, government revenue rose.
  • Certain industries have experienced growth as a result of the GST tax cut on various things, including commercial vehicles, consumer goods, footwear, tobacco, building materials, and logistics.

GST’s Detrimental Effects on India’s Economy

The following is a list of the detrimental effects of GST on the Indian economy:

  • The rise in GST tax rates on various goods caused a decline in several industries, including restaurants, hotels, and branded apparel.
  • The GST tax rate is restricted to these ranges: 0%, 5%, 12%, 18%, and 28%. Previously, different tax rates were applicable to different goods and services.
  • The GST may be causing inflation to rise.
  • Improved value of offerings strategy is an addition to your monthly costs.
  • The GST reporting framework is very extensive and rigorous. A company that has registered for GST is required by law to keep accurate books of accounts and complete multiple monthly returns. As a result, since the implementation of GST, businesses now face higher compliance costs.
  • Prior tax regimes did not require small enterprises to register. For instance, registration under excise law was not required for companies with a revenue of less than Rs. 1.5 crore.

Unless a firm chooses a composition scheme, registration is required under the GST tax system if total turnover exceeds Rs. 10 lakhs in special category states and Rs. 20 lakhs in other states. As a result, all firms, even small ones, must register and comply with certain requirements.

Wrapping Up

There are both positive and negative effects of the GST impact on the Indian economy. The introduction of the GST caused some sectors to prosper while others were still having difficulties. But as a tax system, it offers a lot of advantages and will eventually help the economy in the long run.

Change is certainly never easy. The government is aiming to simplify the transition to GST. It is imperative that we overcome the initial challenges and learn from the mistakes made by other developed countries that implemented GST before us if we are to benefit from a unified tax system.

Frequently Asked Questions

  • How does the GST tax system work?

The GST tax system is levied on the value added to a purchased supply before it is sold again. The proposal suggests imposing taxes at every phase, ranging from production to ultimate consumption, and allowing for the setoff of taxes paid at earlier phases.

  • What is a destination-based tax on consumption?

The tax would be levied against the taxing body that is in charge of the site of consumption, which is also known as the place of supply.

  • What will be the status of Tobacco and related products under the GST regime?

The Goods and Services Tax would apply to tobacco and its products. Furthermore, the Central Excise duty authority would be granted to the center for certain products.

  • Which authority will levy and administer GST?

While the individual states/UTs will levy and administer SGST and UTGST, the center will levy and administer CGST and IGST.

  • Who will decide the rates for the levy of GST? 

The Center and the States would determine the rates at which the CGST and SGST would be imposed jointly. The GST Council’s recommendations would be the basis for notifying the rates.

  • What is the penalty for committing fraud in GST?

Individuals who commit fraud face a penalty of 100% of the tax owed or Rs. 10,000, whichever is greater. People may face prison time in some high-value fraud instances.

  • Are transactions in securities taxable in GST?

Securities, in particular, are not included in the definition of commodities or services. As a result, the securities transaction will be exempt from GST.

  • Will giving away essential commodities by a charitable institution be a taxable activity?

The transaction must be made in the course or furtherance of business for the supply to be taxable under GST. Donations for charitable purposes are not considered supplies subject to GST because there is no exchange of value involved.

  • Who can notify a transaction to be the supply of goods or services?

The Central Government or State Government may designate an activity as either the supply of goods and not the provision of services, the supply of services and not the supply of goods, or neither the supply of goods nor the supply of services, based on the recommendations of the GST Council.

  • Can composition tax be collected from customers?

No, tax collection is not allowed for the registered person under the composition scheme. It implies that a provider for a composition scheme is unable to provide a tax invoice.

author avatar
Aaryan Singh
B.Com degree with finance and accounting Specialisation in Goods and Service Tax (GST) and taxation system Completed certification course on GST from ICAI in 2022 Online GST practitioner course completed in 2023 from Indian Institute of Skill Development and Training.

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