Goods and Services Tax (GST) is the most significant indirect tax reform implemented in the history of Independent India w.e.f. 1 July 2017. A GST regime aligned with overall objectives of removing the cascading, unifying the Indian market, simplifying administration and ease of doing, compliances and ease in doing business are likely to prove to be a catalyst for economic growth and sustainable development in India. GST is a single tax levied on the supply of goods and services from the manufacturer to the consumer. In this backdrop, the key impact points and overall transformation under the GST regime relevant for discussion are encapsulated below –
The significant impact of GST is giving rise to a ‘Centralized supply’ in the value chain, from the manufacture of raw material to the end result of retail to a customer is integrated now. The GST allows companies an opportunity to create centralized supply chain models, thus resulting in substantial savings in logistics and distribution costs. In the pre-GST days, companies had adopted a decentralized supply chain model whereby multiple warehouses were located in different states in India have been operated to avoid tax leakage from the direct inter-state sale of goods. This drastically changes and benefits businesses.
GST law compels the unorganized sector to comply – GST has an inbuilt mechanism for assessment. The defining feature of the informal economy lay in its mysteriousness, which until GST lay beyond the official knowledge of the Government. Under the GST regime, upon such sectors, there is a compulsion for all units to be registered with the GSTN to file returns and upload invoices. If they do not, no one will buy from them. Thus, Compliance with GST means revealing input purchases and sales. That reveals income as well, to the knowledge of the taxman, who could then open up claimed expenses and verify them. This helps formalize a sector that needed transparency. GSTN thus, causes all processes online, which is likely to reduce the interface between the client and the tax assessing authority.
Earlier on, only the Centre taxed services and only the States taxed the trading portion. With the advent of GST, both Centre and States are empowered to tax the value addition in equal measure. Giving an impetus to their revenue collections, as it provides a boost to the governments as they have more funds to allocate as expenditure in their hands. This, in turn, provides an opportunity for the government to not only develop, plan and allocate their expenditures but also increase their spends towards the overall societal structures.
GST is expected to boost the economy and the Tax to GDP ratio – as it has simplified the indirect tax structure, and eliminated the cascading effect of taxes on customers and made doing business easier in the country. Increased revenues in the hands of the government thus, causes the Tax to GDP ratio to help relieve it off the cost of capital investments to decrease. The embedded or deadweight costs that were earlier hidden, are entirely eliminated. In addition, GST benefits the rate of taxation across all sectors to reduce, especially for the services sectors. This is crucial as this will compel lower domestic costs and simultaneously attract foreign investment. Further, such an improvement gives rise to growth as it creates a surplus of funds and brings in higher investments.
There is a buoyancy and control in the collections and the total collection under GST for the month of December 2017 has been Rs. 80,808 crores till 25th December 2017. In comparison to the month of November 2017, post the decisions of the 23rd GST council meeting and amendments implemented, the collections have slipped for the second straight month from over Rs. 83,000 crores in the previous month. As per the data available, GST collections in July was over Rs. 95,000 crores, while in August the figure was over Rs. 91,000 crores. In September, it was over Rs. 92,150 crores and in October it was over Rs. 83,000 crores. 99.01 lakh taxpayers have been registered under GST so far till 25th December, of which 16.60 lakh are composition dealers which are required to file returns every quarter. 53.06 lakh returns have been filed for the month of November till 25th December. Nevertheless, a GST bump effect, though presently not seen but is taking effect is the rise in the collection of Direct Taxes. With the reasons for non-compliance in the trading sector decreasing, it may appear that GST collections are not rising, however, there is a clear indication that businesses are improving their direct tax compliances and also organizing their payments towards a centralized indirect taxation structure.
The Government’s favourable policy regime — including liberalization of the FDI policy framework and launch of major national development programs including Make in India and Digital India — along with a robust business environment has ensured the inflow of foreign capital into the country. Improved governance, favourable conditions to conduct business, transparency in government procedures and responsive policy making with an immediate focus on effective implementation of government reforms will continue to evolve India into a preferred destination for foreign investment.
India is thus set on a growth trajectory that promises all-round development, economic welfare and strong macroeconomic indicators. GST as a radical reform is acting as enablers for boosting the domestic environment which in turn is improving the country’s stature globally. Visit our resources to read more about taxation in India.