GST and its Effect on the Economy

The constitutional bill for the goods and services tax (GST) got passed on 3rd August 2016, marking a historic day in the economic history of the nation. As a major economic reform post the liberalisation of 1991, the passage of the GST bill will finally lead to the realisation of One Nation One Market dream. To meet the aspirations of a young nation, and realise the full impact of its “demographic dividend” – this was one reform measure that was long overdue.

Elimination of tax arbitrage, removal of cascading impact of taxes, expansion of the tax payer base and an increase in tax revenue – are some of the benefits that will accrue to the economy as a result of the Common Market. While the GST is expected to bring in more efficiency, it is yet too early to quantify the full impact of this reform on the economy. General consensus seems to be 1-2% impact on India’s GDP growth rate, in the years ahead. Whatever be the number, there was never a doubt about the growth potential of India. To exploit this potential required focused policy action and the passage of the GST is a step in the right direction.

The real test of GST, will however lie in its implementation. If India were to fail in the proper implementation of GST then it may end with little or no benefit to show on the economic growth front and lower inflation.

With the GST now a fait accompli, India can throw up immense opportunities of growth in the decade ahead. We seem to be at the cusp of a great new era of economic growth and development and this bodes well for investors to look at equity investments as a powerful tool for long-term wealth creation.

A key tax reform that is likely to be implemented in FY18, so -

1. What is GST?

GST (Goods and Services Tax) is one indirect tax for the whole nation, which will make India one unified common market.

It is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Essentially, a tax only on value addition, where the supplier can set-off credits of input taxes paid at each stage to the subsequent stage of value addition. This makes GST a tax only on value addition at each stage. The final consumer to bear only the GST charged by the last dealer in the supply chain, with setoff benefits at the previous stages.

2. Which taxes at the Centre and State level are being subsumed into GST?

With GST being a destination-based tax it will subsume various indirect taxes at Central and State level.

At the Central level it will subsume

    1. Central Excise Duty,
    2. Additional Excise Duty,
    3. Service Tax,
    4. Additional Customs Duty commonly known as Countervailing Duty, and
    5. Special Additional Customs Duty.

At the State level, it will subsume

    1. Subsuming of State and Value Added Tax / Sales Tax,
    2. Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States),
    3. Octroi and Entry Tax,
    4. Purchase Tax,
    5. Luxury Tax, and
    6. Taxes on lottery, betting and gambling.

3. How would GST be administered in India?

Keeping in mind the federal structure of India, the GST will have two components – CGST (Central Goods and Services Tax) and SGST (State Goods and Services Tax).

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.

Source: Government of India prepared FAQ (Frequently Asked Questions) on GST

Frequently Asked Questions (FAQs) on Goods and Services Tax (GST)

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