How GST is impacting Indian economy


GST, India’s biggest tax reform based on the concept of “one country, one market, one tax”, has finally come into effect. The moment the Indian government has been waiting for 10 years has finally arrived. The single largest indirect tax system came into effect, removing all interstate barriers to trade. Once GST came into effect, India became a single market for a population of 1.3 billion.

India’s $2.4-trillion economy is undergoing a major transformation as it eliminates internal tariff barriers and consolidates central, state, and local taxes into a unified GST system. The implementation of GST has reignited hope for India’s fiscal reform program to gain momentum and for the economy to expand. However, there are concerns of potential disruption due to the perceived rushed transition, which may not serve the country’s best interests. The success of GST as a “good and simple tax” will depend on how the government works towards it.

Impact of GST on the Indian Economy

The introduction of GST was meant to be a win-win situation for all stakeholders. Manufacturers and traders would benefit from streamlined tax filings, clear rules, and simplified bookkeeping, while consumers would pay less for goods and services. Additionally, the government would generate more revenue by plugging revenue leaks. However, the implementation of GST has faced challenges, and the actual impact on India’s economy varies. Thus, it is worth examining the real impact of GST on India.

The implementation of the Goods and Services Tax (GST) has brought several benefits to the Indian economy. Here are some of the major ones:

  1. Simplified tax structure: GST has consolidated several indirect taxes, including central, state, and local taxes, into a single tax system. This has simplified the tax structure and made it easier for businesses to comply with tax regulations.
  2. Increased tax revenue: GST has helped the government increase tax revenues by plugging tax leakages and bringing more businesses into the formal economy. This additional revenue can be used to fund infrastructure projects, social welfare programs, and other development initiatives.
  3. Boost to manufacturing and exports: The GST system has streamlined logistics and reduced the compliance burden on businesses, which has made it easier for manufacturers to operate across the country. The reduced cost of compliance has also made Indian products more competitive in global markets, which has boosted exports.
  4. Elimination of inter-state barriers: Prior to GST, different states in India had different tax laws, which created barriers to interstate trade. With the introduction of GST, these barriers have been eliminated, making it easier for businesses to operate across state lines.
  5. Increased transparency: GST has made the tax system more transparent by creating a digital trail of transactions. This has reduced the scope for corruption and improved the overall efficiency of the tax system.

Short-term impact of GST on consumers:

With the implementation of GST, consumers can expect to pay higher taxes on most goods and services. Everyday items now attract the same or slightly higher tax rates, which will ultimately impact the consumer’s pocket. Additionally, the cost of compliance associated with GST is a concern. The compliance costs are likely to be expensive and challenging for small-scale manufacturers and traders, who have voiced their opposition to the same. As a result, these businesses may have to increase their prices, which could ultimately impact the consumer.

Long-term benefits with GST implementation in India

Speaking of long-term benefits, GST is expected to mean a minimal tax slab as well as lower tax rates. Countries where the GST has helped reform the economy only have 2 or 3 tax rates: one average tax rate, lower rates on necessities, and higher rates on luxuries.

The impact of GST on macroeconomic performance will be very positive in the medium term. Inflation is expected to go down as the cascade effect (tax on tax) is eliminated.

The implementation of GST has had a positive impact on the Indian economy by reducing the complexity of the tax system, increasing tax revenues, boosting manufacturing and exports, eliminating interstate barriers, and improving transparency.