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Special Content

Special Article vol. 21

Impact of GST
On Economy and Employment

 Dr. S P Sharma

Since the last many years the taxation system in India  has undergone significant changes with rationalization of tax rates, simplification of tax laws, better compliance mechanisms, ease of tax payment and improved enforcement. Widening tax base and reducing the tax rates in order to bring out a large amount of goods into the tax bracket with ease of doing business has been the focal point of the changes. 

However, structure of indirect taxes is still driven by a multiplicity of taxes- some levied by the Centre and others by the States. Each of these taxes applies to a narrow base both in terms of the economic activity it covers and the base of many of these taxes overlaps creating the problem of double taxation with cascading impact on prices; hence, drawing out money that is generally twice of what should be paid from the pockets of the individuals.

The present structure of taxation for goods and/or services in India impact the manufacturing processes, consumers and economy through its multiplicity, complexity and cascading nature.

*Characterized as a cascading and distorted imposition of tax on production resulting in wrong allocation of resources and decreasing trend of productivity and declining the pace of economic growth.
*Double taxation – arising out of bifurcation of goods and services differential treatment especially in the context of taxation of intangibles.
*Inhibits voluntary and compliance and leads to a narrow Tax/GDP ratio due to a narrow tax base.

Tax system has seen evolution right from the pre existing Central excise duty and the States sales tax systems to VAT, MODVAT and then changing to CENVAT. This has led to harmonizing of sales tax structure through implementation of uniform floor rates of sales tax. Introduction of VAT has been successful in India but there continued to be certain shortcomings in the VAT structure both at Central and State level. For example CENVAT does not include many Central taxes such as additional custom duty, surcharges etc. Moreover, no crucial steps were been implemented to capture the value added chain in the distribution trade below the manufacturing level in the existing scheme of CENVAT. Thus, in order to reduce these loopholes in the taxation system by eliminating the cascading effects of CENVAT and service taxes the rise of the revolutionary reform GST began.

GST Bill (122nd Constitutional Amendment) has been passed by Rajya Sabha and Lok Sabha. With the objective of reducing the cascading effect of tax on the cost of goods and services, GST: The game changing biggest indirect tax reform is being implemented expectedly from April 1, 2017. The implementation of GST in the country is the historic move by the Government which is commendable as India will move towards high growth trajectory in the next few years.

On the occasion of passage of the GST Bill in the Rajya Sabha, Hon’ble Prime Minister, Shri Narendra Modi, called GST as the best example of cooperative federalism and said that this reform will promote Make in India, help exports and thus boost employment while providing enhanced revenue. This is a path breaking decision to give India an indirect tax system for the 21st century. Hon’ble Prime Minister also added on this occasion that they continue to work with all parties and states to introduce a system that benefits all Indians and promotes a vibrant and unified national market. 

GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

The taxes which are at the Centre and State level are being subsumed into GST includes taxes which are at Central level including Central Excise Duty, Additional Excise Duty, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, Special Additional Duty of Customs. While at State level GST will subsume State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, Taxes on lottery, betting and gambling.

There will be two components of GST – Central GST (CGST) and State GST (SGST). Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State. The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output. No cross utilization of credit would be permitted.

Make in India program would also get a boost with improvement in ease of doing business by doing away with multiplicity of taxes and their cascading impact. GST will enhance production possibility frontiers; creating millions of employment opportunities for young population and pushing India’s growth trajectory by two percentage points.  Simplification of taxation and increased growth trajectory would attract more and more FDIs and increase further the employment opportunities in the economy. The spillover effects of GST are immense from increase in Government revenue vis-a-vis better tax compliance and reduced tax evasion, enabling greater control and facilitating efficient monitoring than the traditional taxation system. The increased tax revenues of Government would create scope for enhanced public investments in various social and physical infrastructural activities creating further scope for employment generation.

The implementation of GST will reduce the barriers between states and will make the country a common market. GST will create a common base and common rates across goods and services and reduce transaction costs. A more comprehensive and wider coverage subsuming several Central and State taxes in GST and phasing out of Central Sales Tax will be beneficial for manufactures and consumers as this is expected to reduce the transaction costs of manufacturers and eventually would reflect in reduction of prices of goods. With the reduction in the compliance costs, our trade and industry will become more competitive leading to increased competitiveness not only in the domestic market but also in the international market.

Benefits of GST for business and industry

*Easy compliance: A robust and comprehensive IT system would be the foundation of the GST regime in India. Therefore, all tax payer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent.

*Uniformity of tax rates and structures: GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business.

*Removal of cascading: A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes. This would reduce hidden costs of doing business.

*Improved competitiveness: Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.

*Gain to manufacturers and exporters: The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.

Benefits of GST for Central and State Governments

*Simple and easy to administer: Multiple indirect taxes at the Central and State levels are being replaced by GST. Backed with a robust end-to-end IT system, GST would be simpler and easier to administer than all other indirect taxes of the Centre and State levied so far.

*Better controls on leakage: GST will result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an inbuilt mechanism in the design of GST that would incentivize tax compliance by traders.

*Higher revenue efficiency: GST is expected to decrease the cost of collection of tax revenues of the Government, and will therefore, lead to higher revenue efficiency.

Benefits of GST for the consumers

*Single and transparent tax proportionate to the value of goods and services: Due to multiple indirect taxes being levied by the Centre and State, with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country today are laden with many hidden taxes. Under GST, there would be only one tax from the manufacturer to the consumer, leading to transparency of taxes paid to the final consumer.

*Relief in overall tax burden: Because of efficiency gains and prevention of leakages, the overall tax burden on most commodities will come down, which will benefit consumers.

In conclusion, simplification of taxation is one of the crucial ingredients of the ease of doing business as every potential investor looks at the taxation procedure of the prospective investment destination country. India though holds various strengths in terms of demography, demand and democracy but has been challenged by complications in the ease of doing business. GST implementation is to going to provide impetus to various reforms and polices introduced by the Government for the ease of doing business and to push India to a more simple, transparent and tax friendly regime.

Due to multiple indirect taxes being levied by the Centre and State, with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country today is impacted by cascading impact of taxation. Hence, GST is also beneficial for consumers as there would be only one tax from the manufacturers and service providers to the consumer leading to transparency and efficiency. It will prevent leakages from the system and provide relief in terms of reduced tax burden on most of the commodities.

In a nutshell, GST will promote ease of doing businesses, help in reduction of transactions costs to businesses, boost manufacturing of goods and supply of services, increase price-cost margins of manufacturers, generate employment opportunities for the vast pool of young population with enhanced production possibility frontiers and push overall GDP growth of the economy in much higher trajectory. The need of the hour is to spread awareness at a larger scale about the implementation procedure and advantages of GST to every citizen of the country.

(The author is Chief Economist with PHD Chamber of Commerce and Industry. email spsharma@phdcci.in)