Impact of GST on Indian Economy
GST is a game-changing reform for the Indian Economy, as it will bring the net appropriate price of the goods and services. The various factors that have impacted Indian economy are:
- Increases competitiveness
The retail price of the manufactured goods and services in India reveals that the total tax component is around 25-30% of the cost of the product. After implementation of GST, the prices have gone down, as the burden of paying taxes has been reduced to the final consumer of such goods and services. There is a scope to increase production, hence, competition increases.
- Simple Tax Structure
Calculation of taxes under GST is simpler. Instead of multiple taxation under different stages of supply chain, GST is a one single tax. This saves money and time.
- Economic Union of India
There is freedom of transportation of goods and services from one state to another after GST. Goods can be easily transported all over the country, which is a benefit to all businesses. This encourages increase in production and for businesses to focus on PAN-India operations.
- Uniform Tax Regime
GST being a single tax, it has made it easier for the taxpayer to pay taxes uniformly. Previously, there used to be multiple taxes at every stage of supply chain, where the taxpayer would get confused, which a disadvantage.
- Greater Tax Revenues
A simpler tax structure can bring about greater compliance, this increases the number of tax payers and in turn the tax revenues collected for the government. By simplifying structures, GST would encourage compliance, which is also expected to widen the tax base.
- Increase in Exports
There has been a fall in the cost of production in the domestic market after the introduction of GST, which is a positive influence to increase the competitiveness towards the international market.
Benefits and Challenges to GST
- Removal of multiple taxation.
- Removal of cascading tax effect, i.e. tax on tax.
- Increase in the production of goods and services
- Increase in the demand and supply of goods and services.
- Due to lower burden of taxes, there is a reduction in overall costs.
- Burden has been decreased on the final tax payer, i.e. Consumer at the end.
- Control over the circulation of black money as the system normally followed by traders and shopkeepers will be put to a mandatory check.
Revenue of the government increased by extended tax base.
- Impact on pricing of goods and services due to subsumed taxes.
- To keep a check on the rates of GST. If the rates of GST are over 15%, then the goods would be costlier.
- There are still a few states in India which lack IT Infrastructure.
- A separate law must be drafted.
- Transfer of goods from one state to other all over the country. Continuation of specific exemptions on central GST and state GST.
- Constitutional amendments to enable GST to central and state governments.
- Constitutional amendments to enable levy of GST on imports.
Impact of GST on Different Sectors
- Consumer Goods & Services
The GST rates for the FMCG industry is set at 18-20%. While most are happy with the introduction of GST, the ones who are heavily affected are opposed.
The rates for cabs has been lowered to 5% and for air travel also. So, this is a welcome move for those in this sector.
Post GST, e-commerce operators collect 1% of the net value of the taxable supplies, which is called Tax Collected at Source (TCS).
- Entertainment & Hospitality Sector
This sector was affected as this sector falls in the 28% category. Movie tickets, hotel rates will now be costlier.
- Financial Products and Services
The, financial services such as funds and insurances, (Non-Banking Financial Company) are most impacted.
GST has a positive influence towards start-ups. It had got both advantages and disadvantages for start-ups. However, as a start-up, already facing the stress of a new business, the question of how the new GST will impact your business, must be difficult for you.
- Inflation and Economic Activity
GST is a Inflationary measure. However, the rise in the tax rate on services to 18% is expected to raise inflation.
- Stock Transfer
Post the introduction of GST, tax is levied on branch transfers and input tax can be claimed later.
- Export of Goods & Services
At all stages of the supply chain there is no tax, post GST. Moreover, the availability of input credits is welcomed.
- Gold and Gold Jewellery Prices
Post GST the tax rate was set to 18% initially then brought down to 5% tax rate
Since the implementation of GST the exemption limit for renting out commercial property is Rs. 20 lakhs and there is not GST on house rent.
Under GST regime, SEZ’s have benefitted from a zero-tax rate.
- Affordable Housing
Purchase of houses is non-taxable, however under construction house will carry a GST tax rate. The GST rates for homes purchased under CLSS, EWS, LIG, MIG1/11 will be 8%, after deducting cost of land. However, those doesn’t qualify CLSS, etc, will have to pay 12% GST on constructed houses.
- Real Estate Sector
This sector has mostly benefitted from the introduction of GST, as much of this sector is becoming more transparent.
The rate pre-GST was above 26% and post the implementation of GST there was reduction to 18-21%, which was good news for the sector.
- Manufacturing Industry
GST, demands businesses to set-up mechanism for meeting the requirements of GST. Therefore, once the companies adapt the requirements, the compliance costs will go down drastically.
- Automobile Industry
GST absorbed indirect tax regime, which attracted several duties and taxes on the sale of vehicles and spares and accessories.
- Chemical Industry
Implementation of GST is believed to be positive to the chemical industry, especially in the long term.
- Tobacco Industry
The new GST rates are less than the combined taxes during pre-GST regime.
- Stainless Steel Industry
GST had made a very good impact on steel industry. After issuing new tax rates, it has become more favourable to steel industry. The GST rate for primary steel industries is imposed at 18%, which is helpful for them to grow.
- Textile Industry
Despite some changes under the GST regime, the textile sector benefitted with the implementation of the regime.
- Coal Sector
After the GST implementation, the coal transportation rates have done down to 5% through trains, and thus the logistics costs has been decreased.
- Power Sector
Overall impact of GST on power sector is positive. Domestic coal, is in the 5% tax slab. The impact of GST will be positive for the electrical and the lighting sectors as the rate is now 18%.
In the pre-GST tax system, import of the goods carried several import duties, however, after GST, IGST has replaced the indirect taxes that was earlier imposed on import of goods and services.
- Domestic appliances and Electrical Machinery
There is not a huge impact in this industry as the new GST rates around 25%, which is similar to the rates pre-GST.
- Job works
Special provisions exist for removal of goods for job-work and receiving back goods after processing from the job-worker carry no GST. The benefit of these provisions is extended both to the principal and the job-worker.
- Various segments of Indian Railways
The impact of GST in this sector is very minimal as the rate is kept at the lowest tax rate of 5% to ensure passengers benefit the most.
- Hospitality Industry
This is another industry that has benefited as the previous tax regime levied up to 27% tax. Post GST, the tax rates have been reduced.
- Aviation Sector
The industry has mixed feelings about the introduction of GST, especially the GST rates for airline fuel.
- Pharmaceutical Industry
This industry will see an increase in costs after GST implementation as the cost of medicines will rise by 2.3% in the 12% bracket and medicines with 5% will see no increase in MRP.
- Cement Industry
GST will not affect this industry drastically, the tax rates imposed will get absorbed in the cost of cement production.
- Digital Advertising Industry
This industry which is fast growing, is a cheaper method for companies as GST will have less effect in this sector, as compared to traditional marketing.
- Sweet makers
They are trying to figure out if they need to pay 28% tax on it as many of our chocolate variations have more than 5% cocoa content. Badam milk, basundi and rasmalai are also a concern as we aren’t sure if they are sweets (5% tax) or beverages (12% tax).
- Handicraft Sector
One of the largest sector of the country, which is most affected by GST. Therefore, GST is not welcomed by the artisans.
- Alcohol Industry
There is no GST on alcohol, instead there is an increase in the price of alcohol. Price of a beer is going to raise by 15% and wine and other hard drinks will be increasing by 4%.