Economics, in its very essence basically involves just two things – problems and reforms. Economic reforms are an essential part of the modern day economics for all the economies of the world, but to a developing nation like India, this means even more. One such reform which recently took place in India is the Goods & Services Tax Act, 2017. In simple terms, GST is an indirect tax levied on all the goods and services produced within the domestic territories of an economy which essentially replaced numerous other taxes levied by the Central government and the State governments. It was put into force on July 1, 2017 and is governed by the newly born GST Council which is chaired by the Finance Minister of India.
Since everything related to this Bill took place hurriedly, many questions were left unanswered especially from the economics point of view. Among many others lies one pertinent question.
What would the implications of GST be in terms of economics?
According to experts, the biggest economic impact of GST will be a decline in inflation levels because most of the goods produced have been allotted low tax slabs (5% or 12%) under GST or have been exempted from tax. Even RBI’s move of repo rate reduction from 6.25% to 6.00% is being seen as a corollary to GST as it intends to keep inflation levels not more than 4%. GST even puts a halt to tax cascading i.e. tax on tax, which will again bring down the general price level.
Moreover, the producers will now be able to claim input tax credit for every single good they produce which implies they will not have to pay input taxes again along with output tax. This will further boost up production which would automatically lead to an increase in welfare for all those working in the manufacturing sector along with job creation in some cases as well.
Economic growth, the term which holds some meaning for even a layman, has no signs of showing any sort of improvements in the short term but yes, in the medium and long term the prospects of economic development and growth are extremely high. In fact, experts believe that the macroeconomic indices of India will portray a holistically positive picture in the medium term, all thanks to GST.
GST also aims to bring more and more companies, be it small or big under the tax net. This clearly points to a shift of all the unorganised sector firms to the organised sector as they will have to change all their methods of operations. This even includes asking all their suppliers, creditors, debtors for invoices which will act as transaction proofs and further help them in the tax compliance process.
Although the tax compliance costs are expected to rise for small firms discouraging them to continue operations, for the government this is no less than a boon. This is because more and more companies will end up under the tax net of the government, obviously pushing up the revenue of the government and providing it a way to do away with its fiscal deficits. However, for small firms all the tax compliance formalities such as maintaining proper accounts, invoices and other proofs, etc. for presenting them to the government will increase their burden in monetary terms, which is of course a very big challenge for the government.
Next on the line are the benefits of GST to the general public. GST aims at passing on economic benefits to the general public directly. This can be understood through the following simple logic. GST rate has been set quite low on daily use commodities, which obviously means that the prices of these goods will fall, eventually benefitting the customer. However, companies don’t intend to pass on this benefit to the consumer lately, because of which they grab a part of the profit by not completely lowering the prices and use it for dealing with tax compliance costs, killing the very motive of GST implementation. The government however forbids this but still complete transparency neither exists nor will in the future.
Moving on towards the end of this endless seaming streak of implications of GST, some businessmen feel that GST may provide them with an ease of doing business as it boasts of bolstering investor sentiments, of luring the much needed foreign exchange and the removal of tax barriers and custom duties when it comes to foreign trade.
Therefore, the Goods & Services Tax Act will prove out to be a very noteworthy and important step in the field of economic reforms in India. It is expected to eradicate double taxation and make the process easy for both the government as well as the taxpayers. However, nothing in this world is perfect making GST liable to a few demerits which may prove out to be hazardous, yet are controllable.
So according to me what basically matters in the end is the outlook of every Indian towards GST, whether he trusts his government or not, whether he wants to see his nation developing or not for GST will do it’s bit but it’s us, the citizens who need to support it and believe it so that we can together take this wonderful nation to even greater heights.