What is GST and How Will Indian Economy be Affected by it?

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With the term GST widely in news these days, it is important to know how our economy will be affected by it.

• The GST will reshape the indirect tax structure by subsuming majority of indirect taxes like excise, sales and services levies. This will remove the complex indirect tax structure of the country, thus improving the ease of doing business in the country.
• Exports will become competitive as the GST regime will eliminate the cascading impact of taxes. A National Council of Applied Economic Research study suggested that GST could boost India’s GDP growth by 0.9-1.7 per cent.
• GST will lead to the creation of a unified market, which would facilitate seamless movement of goods across states and reduce the transaction cost of businesses. A UBS Securities study found that truck drivers in India spend 60 per cent of their time off roads negotiating check posts and toll plazas. The foreign brokerage said that 11 categories of taxes are levied on the road transport sector. The GST will help bring down logistical costs.
• Under the GST, manufacturers will get credits for all taxes paid earlier in the goods/services chain, thus incentivising firms to source inputs from other registered dealers. This could bring in additional revenues to the government as the unorganised sector, which is not a part of the value chain, would be drawn into the tax net.
• The new tax regime is seen as less intrusive, more self-policing, and hence a more effective way of reducing corruption.
• The supplier, because of the paper trail left by the GST, knows that his evasion will be more likely to be detected once his client is audited. GST will improve tax compliance.
• The clean-up of the Indian taxation system will reduce the number of excise duty exemptions. According to the government’s estimates, excise tax exemptions result in foregone revenues of Rs.1.8 lakh crore. The comparable figure for the states is about Rs.1.5 lakh crore. Together, India loses about 2.7 per cent of GDP because of exemptions.
• Implementation of GST is expected to lead a temporary rise in inflation, which will typically last for a year.