Goods and Service tax is a value added comprehensive indirect tax levied on manufacture, sale and consumption of goods and services at national level. GST would subsume majority of both central (central excise duty, service tax, etc) and state indirect taxes (state value added tax, entry tax, luxury tax, etc) into a single tax rate.



GST is levied only on the value added at every stage of production and provides complete set-off in the entire chain of production and distribution. This would end the multiplicity of taxes and create a pan-India tax regime and a common market. For example, if at production stage, 18 per cent GST is levied on Rs 1,00,000, tax outflow would be Rs 18,000. At the next stage, when the same product is sold for Rs 1,50,000, tax will only be levied on Rs 50,000 (150K-100K). Accordingly, first stage owner would pay Rs 18,000 tax and second stage owner would get set off of Rs 18,000 and pay Rs 9,000 tax.



Positive impact of GST on Indian Economy: It is anticipated that GST implementation in India would increase its real GDP growth. Following are the factors which are expected to contribute to the higher economic growth:



Lower Inflation: GST is expected to eliminate double taxation system in India which is one of the key reasons for higher input cost. Unlike our present indirect tax system in India, which is suffering from the cascading effect, GST would lesson overall tax burden on consumer on account of single tax rate and unified common market. Although VAT, introduced in 2005, has been successful to curb double taxation to some extent, however there are many industries such as oil and gas where input credit is not provided, hence consumer end up paying tax on tax. GST being the comprehensive tax system would widen the coverage of input tax set-off and service tax set off which would result in fall in goods price. Lower inflation would lead to higher saving, higher investment and hence higher real GDP growth.



Efficient Logistic and supply chain management: GST implementation would ensure reduced compliance procedures for inter-state transaction, lesser state border check-points, lower traffic jams by trucks and effective toll-plaza management on account of pan-India amalgamated market. Currently, Indirect tax system in India treats taxation of goods and services separately that requires splitting of transaction values into value of goods and services for taxation. This requires lot of paper work and checks post administration for inter-state transaction which creates administrative and compliance hurdles. GST is expected to remove all these inefficiencies and will strengthen supply chain management. Consequently, an efficient logistic system would lead to higher productivity and higher GDP growth.



Export Competitiveness: Fall in cost of manufactured goods and services, efficient logistic and warehousing, simplified tax administration and paper work under GST will increase the competitiveness of Indian goods and services in the international market. This would lead to higher exports, thus resulting in reduction of current account deficit and increase in real GDP.



Manufacturing and FDI: GST would provide much needed impetus to Indian manufacturing sector which has been starving due to mainly weak consumer demand, high cost structure and complex tax system. A simplified comprehensive tax structure with negligible tax cascading effect would ensure cost competitiveness. A globally accepted taxation system and improved efficiency & productivity would encourage FDI inflow in manufacturing over a period of time given large consumer market, demographic advantages, and increasing middle class spending in India.



Fiscal Deficit: A simplified, transparent and self-regulatory tax system will broaden the tax base and is likely to generate higher revenues. GST would encourage large unorganised market (that is not paying taxes as of date) to participate given the credits will be given to the one who has paid earlier in the goods/services chain. This will incentivise tax-paying firms to source inputs from organised market. Additionally, simplified tax system will be effectively administered by the Govt, thus reducing cost to administration. Overall, lower fiscal deficit would lead to higher Govt’s investment in infrastructure and other economic activities that will result in higher GDP growth.



Key Issues: The other Side of the coin:



GST implementation: Initially, Government will have to spend lot of resources on setting up IT systems and personnel training to implement GST across India. Like VAT, this would be a challenging assignment for centre and states.



Centre and states conflict: Expected GST in India is going to be diluted somewhat as certain commodities such as Alcohol are not expected to be covered under GST. This would allow the states to levy tax on these items based on current structure.



Higher fiscal deficit and inflation in short term:



Way forward: Existing indirect tax regime in India is characterized as cascading and complex which has restricted India to report its potential GDP growth. GST, a simplified comprehensive tax structure, is likely to shift the tax burden from production to final consumption which should result in lower inflation, efficient logistics and distribution, larger tax base, export competitiveness and higher FDI inflows in manufacturing.

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