Impact of GST on the Indian Economy

GST is here! How is our economy and the businesses coping with this new tax policy?
Let our experts tell you about the same.

Updated on Jun 12, 2018 - 05:06:45 PM

GST the biggest tax reform in India founded on the notion of “one nation, one market, one tax”
is finally here. The moment that the Indian government was waiting for a decade has finally
arrived. The single biggest indirect tax regime has kicked into force, dismantling all the inter-
state barriers with respect to trade. The GST rollout, with a single stroke, has converted India
into a unified market of 1.3 billion citizens. Fundamentally, the $2.4-trillion economy is
attempting to transform itself by doing away with the internal tariff barriers and subsuming
central, state and local taxes into a unified GST.

The rollout has renewed the hope of India’s fiscal reform program regaining momentum and
widening the economy. Then again, there are fears of disruption, embedded in what’s perceived
as a rushed transition which may not assist the interests of the country.
Will the hopes triumph over uncertainty would be determined by how our government works
towards making GST a “good and simple tax”. The idea behind implementing GST across the
country in 29 states and 7 Union Territories is that it would offer a win-win situation for
everyone. Manufacturers and traders would benefit from fewer tax filings, transparent rules,
and easy bookkeeping; consumers would be paying less for the goods and services, and the
government would generate more revenues as revenue leaks would be plugged. Ground
realities, as we all know, vary. So, how has GST really impacted India? Let’s take a look.

GST: The Short-Term Impact

From the viewpoint of the consumer, they would now have pay more tax for most of the goods
and services they consume. The majority of everyday consumables now draw the same or a
slightly higher rate of tax. Furthermore, the GST implementation has a cost of compliance
attached to it. It seems that this cost of compliance will be prohibitive and high for the small
scale manufacturers and traders, who have also protested against the same. They may end up
pricing their goods at higher rates.

What the Future Looks Like

Talking about the long-term benefits, it is expected that GST would not just mean a lower rate of
taxes, but also minimum tax slabs. Countries where the Goods and Service Tax has helped in
reforming the economy, apply only 2 or 3 rates – one being the mean rate, a lower rate for
essential commodities, and a higher tax rate for the luxurious commodities. Currently, in India,
we have 5 slabs, with as many as 3 rates – an integrated rate, a central rate, and a state rate. In
addition to these, cess is also levied. The fear of losing out on revenue has kept the government
from gambling on fewer or lower rates. This is very unlikely to see a shift anytime soon; though
the government has said that rates may be revisited once the RNR (revenue neutral rate) is
reached.

The impact of GST on macroeconomic indicators is likely to be very positive in the medium-
term. Inflation would be reduced as the cascading (tax on tax) effect of taxes would be
eliminated. The revenue from the taxes for the government is very likely to increase with an
extended tax net, and the fiscal deficit is expected to remain under the checks. Moreover,
exports would grow, while FDI (Foreign Direct Investment) would also increase. The industry
leaders believe that the country would climb several ladders in the ease of doing business with
the implementation of the most important tax reform ever in the history of the country.

Summing Up

On priority, it is up to the government to address the capacity building amongst the lesser-
endowed participants, such as the small-scale manufacturers and traders. Ways have to be
found for lowering the overall compliance cost, and necessary changes may have to be made
for the good of the masses. GST will become good and simple, only when the entire country
works as a whole towards making it successful.

When was GST Launched in India?

On 1st July 2017 at midnight, the President of India, Sir Pranab Mukherjee and Prime Minister Sir
Narendra Modi launched GST all over India including Jammu & Kashmir. However, there have
been many changes made to the rates of GST, the latest being on 18th January 2018.

In a short span of time, all the states approved their State GST (SGST) laws. Union territories with
legislatures, i.e., Delhi and Puducherry, have adopted the SGST Act and the other 5 union
territories without legislatures have adopted the UTGST Act.

The idea of introducing GST was first proposed by the then Union Finance Minister, P.
Chidambaram in his Budget for 2006-07. The discussion on GST took specific decision with the
introduction of the Constitutional Bill (122nd Amendment), 2014. The Bill was passed by the
Parliament on 8 August 2016. This was followed by the approval of the Bill by more than 15
states. On 12 April 2017, the Central Government enacted four GST bills:

 Central GST (CGST) Bill

 Integrated GST (IGST) Bill
 Union Territory GST (UTGST) Bill
 The GST (Compensation to States) Bill
Why was GST Introduced in India?

In the Indian economy, the service sector contributes to over 55%. Separate taxation of goods
and services is neither viable nor desirable. GST in India had been introduced to reduce the tax
burden that’s on both companies and consumers. In the previous system, there were multiple
taxes added at each stage of the supply chain, without taking credit for taxes paid at previous
stages. As a result, the end cost of the product does not clearly show the actual cost of the
product and how much tax was applied. The tax structure was complex. GST integrated most of
the taxes into one single tax, where the consumers are benefited. This method provides Input
Tax credit paid on the purchase of goods and services, which can be offset with the tax to be
paid on the supply of goods and services. As a result, this reduces the overall cost, with the end
customer paying less.

Impact of GST on Indian Economy

GST is a game-changing reform for the Indian Economy, as it will bring the net appropriate price
of the goods and services. The various factors that have impacted Indian economy are:

1. Increases competitiveness
The retail price of the manufactured goods and services in India reveals that the total tax
component is around 25-30% of the cost of the product. After implementation of GST, the
prices have gone down, as the burden of paying taxes has been reduced to the final
consumer of such goods and services. There is a scope to increase production, hence,
competition increases.
2. Simple Tax Structure
Calculation of taxes under GST is simpler. Instead of multiple taxation under different stages
of supply chain, GST is a one single tax. This saves money and time.
3. Economic Union of India
There is freedom of transportation of goods and services from one state to another after GST.
Goods can be easily transported all over the country, which is a benefit to all businesses. This
encourages increase in production and for businesses to focus on PAN-India operations.
4. Uniform Tax Regime
GST being a single tax, it has made it easier for the taxpayer to pay taxes uniformly.
Previously, there used to be multiple taxes at every stage of supply chain, where the taxpayer
would get confused, which a disadvantage.
5. Greater Tax Revenues
A simpler tax structure can bring about greater compliance, this increases the number of tax
payers and in turn the tax revenues collected for the government. By simplifying structures,
GST would encourage compliance, which is also expected to widen the tax base.
6. Increase in Exports
There has been a fall in the cost of production in the domestic market after the introduction
of GST, which is a positive influence to increase the competitiveness towards the international
market.

Benefits and Challenges to GST

Benefits

 Removal of multiple taxation.

 Removal of cascading tax effect, i.e. tax on tax.
 Increase in the production of goods and services
 Increase in the demand and supply of goods and services.
 Due to lower burden of taxes, there is a reduction in overall costs.
 Burden has been decreased on the final tax payer, i.e. Consumer at the end.
 Control over the circulation of black money as the system normally followed by traders
and shopkeepers will be put to a mandatory check.
Revenue of the government increased by extended tax base.

Challenges

 Impact on pricing of goods and services due to subsumed taxes.

 To keep a check on the rates of GST. If the rates of GST are over 15%, then the goods
would be costlier.
 There are still a few states in India which lack IT Infrastructure.
 A separate law must be drafted.
 Transfer of goods from one state to other all over the country. Continuation of specific
exemptions on central GST and state GST.
 Constitutional amendments to enable GST to central and state governments.
 Constitutional amendments to enable levy of GST on imports.

Impact of GST on Different Sectors

1. Consumer Goods & Services

The GST rates for the FMCG industry is set at 18-20%.  While most are happy with the
introduction of GST, the ones who are heavily affected are opposed.
2. Transportation
The rates for cabs has been lowered to 5% and for air travel also.  So, this is a welcome move
for those in this sector.
3. E-Commerce
Post GST, e-commerce operators collect 1% of the net value of the taxable supplies, which is
called Tax Collected at Source (TCS).
4. Entertainment & Hospitality Sector
This sector was affected as this sector falls in the 28% category.  Movie tickets, hotel rates will
now be costlier.
5. Financial Products and Services
The, financial services such as funds and insurances, (Non-Banking Financial Company) are
most impacted.
6. Start-Ups
GST has a positive influence towards start-ups. It had got both advantages and disadvantages
for start-ups. However, as a start-up, already facing the stress of a new business, the question
of how the new GST will impact your business, must be difficult for you.
7. Inflation and Economic Activity
GST is a Inflationary measure. However, the rise in the tax rate on services to 18% is expected
to raise inflation.
8. Stock Transfer
Post the introduction of GST, tax is levied on branch transfers and input tax can be claimed
later.
9. Export of Goods & Services
At all stages of the supply chain there is no tax, post GST. Moreover, the availability of input
credits is welcomed.
10. Gold and Gold Jewellery Prices
Post GST the tax rate was set to 18% initially then brought down to 5% tax rate
11. Rent
Since the implementation of GST the exemption limit for renting out commercial property is
Rs. 20 lakhs and there is not GST on house rent.
12. SEZ
Under GST regime, SEZ’s have benefitted from a zero-tax rate.
13. Affordable Housing
Purchase of houses is non-taxable, however under construction house will carry a GST tax
rate. The GST rates for homes purchased under CLSS, EWS, LIG, MIG1/11 will be 8%, after
deducting cost of land. However, those doesn’t qualify CLSS, etc, will have to pay 12% GST on
constructed houses.
14. Real Estate Sector
This sector has mostly benefitted from the introduction of GST, as much of this sector is
becoming more transparent.
15. Logistics
The rate pre-GST was above 26% and post the implementation of GST there was reduction to
18-21%, which was good news for the sector.
16. Manufacturing Industry
GST, demands businesses to set-up mechanism for meeting the requirements of GST.
Therefore, once the companies adapt the requirements, the compliance costs will go down
drastically.
17. Automobile Industry
GST absorbed indirect tax regime, which attracted several duties and taxes on the sale of
vehicles and spares and accessories.
18. Chemical Industry
Implementation of GST is believed to be positive to the chemical industry, especially in the
long term.
19. Tobacco Industry
The new GST rates are less than the combined taxes during pre-GST regime.
20. Stainless Steel Industry
GST had made a very good impact on steel industry. After issuing new tax rates, it has
become more favourable to steel industry. The GST rate for primary steel industries is
imposed at 18%, which is helpful for them to grow.
21. Textile Industry
Despite some changes under the GST regime, the textile sector benefitted with the
implementation of the regime.
22. Coal Sector
After the GST implementation, the coal transportation rates have done down to 5% through
trains, and thus the logistics costs has been decreased.
23. Power Sector
Overall impact of GST on power sector is positive. Domestic coal, is in the 5% tax slab. The
impact of GST will be positive for the electrical and the lighting sectors as the rate is now
18%.
24. Exports
In the pre-GST tax system, import of the goods carried several import duties, however, after
GST, IGST has replaced the indirect taxes that was earlier imposed on import of goods and
services.
25. Domestic appliances and Electrical Machinery
There is not a huge impact in this industry as the new GST rates around 25%, which is similar
to the rates pre-GST.
26. Job works
Special provisions exist for removal of goods for job-work and receiving back goods after
processing from the job-worker carry no GST. The benefit of these provisions is extended
both to the principal and the job-worker.
27. Various segments of Indian Railways
The impact of GST in this sector is very minimal as the rate is kept at the lowest tax rate of 5%
to ensure passengers benefit the most.
28. Hospitality Industry
This is another industry that has benefited as the previous tax regime levied up to 27% tax.
Post GST, the tax rates have been reduced.
29. Aviation Sector
The industry has mixed feelings about the introduction of GST, especially the GST rates for
airline fuel.
30. Pharmaceutical Industry
This industry will see an increase in costs after GST implementation as the cost of medicines
will rise by 2.3% in the 12% bracket and medicines with 5% will see no increase in MRP.
31. Cement Industry
GST will not affect this industry drastically, the tax rates imposed will get absorbed in the cost
of cement production.
32. Digital Advertising Industry
This industry which is fast growing, is a cheaper method for companies as GST will have less
effect in this sector, as compared to traditional marketing.
33. Sweet makers
They are trying to figure out if they need to pay 28% tax on it as many of our chocolate
variations have more than 5% cocoa content. Badam milk, basundi and rasmalai are also a
concern as we aren’t sure if they are sweets (5% tax) or beverages (12% tax).
34. Handicraft Sector
One of the largest sector of the country, which is most affected by GST. Therefore, GST is not
welcomed by the artisans.
35. Alcohol Industry
There is no GST on alcohol, instead there is an increase in the price of alcohol. Price of a beer
is going to raise by 15% and wine and other hard drinks will be increasing by 4%.

Impact of GST on a Short term

Before the implementation of GST, consumers paid more for goods and services, however,
everyday consumables saw no major change in rates. The main drawback is on the small and
medium enterprises, who will incur costs in trying to become GST compliant, which may result in
higher prices of goods.

How Goods And Service Tax (GST) Impacts Five Key Sectors Of India's Economy
Karan KashyapContributor
I cover startup ecosystems and policy in South Asia.


A bill is clumped together with others at a restaurant with the new Goods and Services Tax

(GST) added to it, in Mumbai, India, Friday, July 01, 2017. (Photo Credit: AP Photo/Rajanish

Kakade)

Since GST’s implementation over the past few days, startups have been pinging @askGST_GoI, the
official Twitter handle of the Government of India, for clarity on this new tax reform. As their enterprises
are vulnerable to any major changes in economy due to a new policy implementation, founders and
employees of these companies are extremely concerned about the impact of the four tax slabs of 5%,
12%, 18%, and 28% that have been specified in GST. Many Indian businesses have limited capital and
resources at their disposal, meaning that any confusion can quickly escalate into panic.

Along with these concerned parties, millions of customers are wondering about the impact of this new tax
system on the amount of money they will need to shell out to avail of their preferred goods and services.

In this article, I'll attempt to break down the impact of GST on the most popular sectors of India's startup
ecosystem, including real estate, e-commerce, hospitality, smartphones, and ride hailing.

Real Estate

Under the new tax structure, due to the input credit benefits that most builders will get on the key raw
materials they buy, the base price of property projects launched post 1 July 2017 will be comparatively
cheaper. Buying under-construction properties will attract a net effective rate of 12% as against the earlier
rate of 5.5% (including value added tax and service tax). Real estate players such as Proptiger and Quikr
want to pass this cost benefit on to property buyers. “For new projects with 100% input credit passed to
the buyer and land cost being 50% of the project cost, we expect property prices to fall by around 1% in
western and northern markets and around 3% in southern markets,” said a report by Edelweiss.  However,
prices of ready-to-move-in apartments with completion certificates, before implementation of GST on 1
July, would remain steady as these properties are out of the GST ambit. Any price change in the segment
will depend purely on demand and supply.

E-commerce

E-commerce websites such as Flipkart and Amazon.in will have to collect TCS (tax collected at source) at
a fixed 1% rate, and pay this collection to the sellers listed on their websites. This is likely to impact
prices and make online shopping more expensive. Though the latest notification issued by the government
stated that the provisions of “TDS (Section 51 of the CGST/SGST Act 2017) and TCS (Section 52 of the
CGST/SGST Act, 2017) will be brought into force from a date which will be communicated later.”

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Also to deal effectively with GST, e-commerce platforms are regularly engaging and training the sellers
on their stores. Commenting on GST’s impact Rajiv Kumar, Founder, e-commerce website StoreHippo
has stated: “We are thrilled to announce the reformation of our tax engine in accordance to GST. E-
Commerce platforms need to provide flexible and powerful tax solutions after the implementation of GST
and StoreHippo facilitates this through its new move, aimed at simplifying GST for all involved.”
Indian tourists enjoy Shikara, a traditional wooden boat, with the backdrop of snow covered

mountains at the Dal Lake in Srinagar, India. (Photo Credit: AP Photo/Dar Yasin)

More on Forbes: The Four Benefits Of The New Goods And Services Tax (GST) For Startups In India

Travel and tourism

Depending on room rates there are four slabs for hotels and lodges. While Hotels and lodges with room
rates below $16 (Rs 1,000) a day have been exempted from GST, accommodation costing $16 - $39 (Rs
1,000-Rs 2,500), $39 - $117 (Rs 2,500-7500) and above $117 (Rs 7500) will attract 12% 18%, and a 28%
tax slab respectively. Ritesh Agarwal, founder and CEO, OYO concurs that the lower tax rate for budget
hotels sector will ensure that the industry’s quality upgrade continues while delivering standardized
accommodation to millions of middle-class travelers. He says, “Hotels are the single biggest contributor
to tourism industry which accounts for 7.5% of the GDP. The move will boost revenue from the travel &
tourism sector for the next many years. The industry is expected to contribute $280 Billion to the GDP by
2026 and will pass on the benefits of uniform taxation across the country to travelers.” Budget travelers
also have a reason to cheer as air travel for economy class passengers has become cheaper. On the other
hand, business class fares are going to cost more with a marginal increase from earlier 9% to GST rate of
12%.

Ride Hailing Apps

Tax rates are expected to rise from 14.5% to a range between 29% and 43% for drivers who do not own
cars and are associated with Ola and Uber cab-leasing programs. This is due to leases becoming costlier
post-GST. For instance, these individuals were paying an EMI of Rs 25,000 pre-GST, and in a present
scenario they are likely to pay an EMI of around Rs 35,000 to Rs 40,000 post-GST.

Transport services have been taxed at 5%, which will also apply to cab aggregators like Ola and Uber.
The government has not only reaffirmed its pro-consumer, pro-business stance by keeping transport
services in the lowest tax bracket but also put to rest any apprehensions among drivers and riders around
GST rates being inflationary. Thus, GST will bring down the tax rate for ride-hailing services marginally.
The new rate structure as compared to the previous service tax rate of 6% is a step in the right direction
by the GST council. But while the 1% fall may bring some cheer to consumers, driver partners of both
Ola and Uber will be affected.

More on Forbes: The Food Delivery Apps That Are Competing To Gain Market Share In India
Photographer: Dhiraj Singh/Bloomberg

Smartphones

Under GST, mobile handsets are being taxed at 12% as compared to an earlier range of 8-18%
implemented in various states. As a result of this average reduction in tax levied, Apple has reduced
prices of its iPhone by 7.5% and Lenovo has announced a reduction in prices of models sold through
offline brick and mortar stores. Motorola handsets, a Lenovo owned entity, sold through brick-and-mortar
stores are also likely to see a downward price revision in coming days.
According to Rajesh Agarwal, co-founder of Micromax: “The government seems to be in a ‘walk the
talk’ mode, they have been fostering a local manufacturing environment in the country and have been
mindful of the early investments that have been made into manufacturing in India by many corporate
houses already.” A further 10% basic customs duty has been levied on imports of mobile phones to give
protection to local production, thereby giving impetus to several local companies such as Micromax,
Intex and foreign firms including Foxconn, Flex, Salcomp and iPhone-maker Wistron, that have pumped
millions into setting up more than 70 phone and component manufacturing units over the past couple of
years.

I have been working as a consultant with startups for the past several years. To assist them get a firm grip
over their operations I have studied management science, economics and foreign trade. In 2009 I was part
of an Indian contingent to United Nations Conference, COP-15 ...
 MORE
To see more stories on the startup ecosystem in South Asia, follow me on Twitter at @Krn_Kashyap

Impact of GST on Indian economy

By
Nihal Kothari
25 July, 2016
SHARE

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The introduction of Goods and Service Tax (GST) in India is now on the horizon. The
Constitution Amendment Bill to replace existing multiple indirect taxes by uniform GST across
India is likely to be taken up for voting in Rajya Sabha during this week. Lok Sabha has already
passed this Bill.
The current indirect tax structure is major impediment in India’s economic growth and
competitiveness. Tax barriers in the form of CST, entry tax and restricted input tax credit have
fragmented the Indian market. Cascading effects of taxes on cost make indigenous manufacture
less attractive. Complex multiple taxes increase cost of compliance. In this scenario, the
introduction of GST is considered crucial for economic growth. GST will have quite a favourable
impact on Indian economy. Some sectors will have more favourable impact compared to others
under the proposed GST.
Removal of tax barriers on introduction of uniform GST across the country with seamless credit,
will make India a common market leading to economy of scale in production and efficiency in
supply chain. It will expand trade and commerce. GST will have favourable impact on organised
logistic industry and modernised warehousing. 
GST will remove cascading effect of taxes imbedded in cost of production of goods and services
and will provide seamless credit throughout value chain. This will significantly reduce cost of
indigenous goods and will promote ‘Make in India’. The sectors which have long value chain
from basic goods to final consumption stage with operation spread in multiple states such as
FMCG, pharma, consumer durables, automobiles and engineering goods will be the major
beneficiaries of GST.   
GST will facilitate ease of doing business in India. Integration of existing multiple taxes into
single GST will significantly reduce cost of tax compliance and transaction cost.
Stable, transparent and predictable tax regime will encourage local and foreign investment in
India creating significant job opportunities.
Electronic processing of tax returns, refunds and tax payments through ‘GSTNET’ without
human intervention, will reduce corruption and tax evasion. Built-in check on business
transactions through seamless credit and return processing will reduce scope for black money
generation leading to productive use of capital.
Significant reduction in product and area-based exemptions under GST will widen the tax base
with a consequent reduction in revenue neutral rate. This will enable the government to keep
GST rates lower which may have favourable impact on prices of goods in the medium term.
The tax rate for services however may go up by 2 to 3% from the present level of 15%. The
adverse impact of rate increase on services will be partially neutralised by availability of
seamless input tax credit.   
GST will eliminate the scope of double taxation in certain sectors due to tax dispute on whether
a particular transaction is for supply of goods or provision of service such as licensing of
intellectual properties like patents and copyrights, software, e-commerce and leasing.
While the GST will simplify tax structure, it will increase the burden of procedural and
documentary compliance. Number of returns will increase significantly so also the extent of
information. For instance, a real estate developer or contractor will have to file 61 returns in a
year compared to 24 returns at present. Similarly a taxable person providing services from
several states will have to take registration and file return in all such states. Currently a single
centralised registration is required in such cases.
GST will also have impact on cash flow and working capital. Cash flow and working capital of
business organisations which maintain high inventory of goods in different states will be
adversely affected as they will have to pay GST at full rate on stock transfer from one state to
another. Currently CST/VAT is payable on sale and not stock transfers.
It is also pertinent to note that all indirect taxes will not be subsumed in GST. Electricity duty,
stamp duty, excise duty and VAT on alcoholic beverages, petroleum products like crude, natural
gas, ETF, petrol and diesel will not be subsumed in GST on its introduction. These taxes will
form part of the cost of these goods when used as inputs in downstream products. Hence those
sectors where these goods form significant input cost such as plastics and polymers, fertilisers,
metals, telecom, air transport, real estate will not get full benefit of GST.  
Major beneficiary of GST would be sectors like FMCG, Pharma, Consumer Durables and
Automobiles and warehousing and logistic industry.
High inflationary impact would be on telecom, banking and financial services, air and road
transport, construction and development of real estate,                 
While GST is eagerly awaited by the industry, the legal process to implement GST in India is
quite long and complex. After the Constitution Amendment Bill is passed by the Parliament with
two-thirds majority, it will have to be passed by at least 15 states. There after GST council has
to be constituted which will recommend model GST law and GST rates. On such
recommendation, GST Act and Rules have to be enacted by the Parliament and each state
assembly. Then implementation date has to be notified. It is therefore quite important that the
Constitution Amendment Bill is passed in the current Monsson Session if GST is to be
implemented during the tenure of present Parliament which ends during 2019.  
Nihal Kothari is executive director at corporate law firm Khaitan & Co. Views are personal.