How will GST help the economy - Motilal Oswal
How will GST help the economy - Motilal Oswal

How will GST help the economy?

Will the GST really help the economy? Prima facie, that is the broad experience from the experience of other nations and also from our own experience in the last 1 year. Before we see how GST will help the Indian economy and studying GST and its impact on the Indian economy, let us look at some apparent benefits of the GST implementation.
 

Creates a national market for goods and services

A uniform rate of tax eventually will add to simplicity

Interstate trade becomes easier with all taxes virtually subsumed into GST

Benefits companies as their logistics structures can now focus on opportunities rather than on interstate taxes

A bigger thrust to the organization and the formalization of the unorganized sector and will bring them into the business mainstream

Increase GST revenues over time by widening and broadening the base of tax payers and bringing more businesses under the GST ambit

Let us look at some of the merits in greater detail
 
There will be just one rate of indirect tax, and that makes it really simple..
 
The big advantage of GST is that it reduces all your indirect taxes to just one single rate. The complexity and multiplicity of rates is gone. Normally, companies pay excise duty on production, customs duty on imports, and service tax on any service rendered within India and sales tax when there is an inter-state sale. All these are now subsumed into GST. In addition, you pay VAT when you eat at a restaurant and end up paying Octroi when enter a municipality. After all this, you pay entertainment tax when you watch a movie. Except customs duty, all other taxes have been largely subsumed into GST.
 
Necessities are cheaper and sin goods are dearer
 
In the past you paid excise duty at around 12.5% and additional VAT at 14%. That takes the effective rate of tax to 28%. You may not realize but you end up paying this 28% tax each time you buy a product. The GST Bill combines this into a single average rate. The GST Council has been extremely liberal in reducing the GST on food, food products and items of mass consumption to the bare minimum bracket. In addition sin and luxury goods will attract higher GST and will be used to compensate for the lower GST on food products. The impact on inflation will surely be salutary.
 
It will impose some discipline on online buyers on ecommerce websites
 
The front pages of most newspapers these days are full of discount ads on websites like Flipkart and Amazon. Indians have been spoilt for choice in the last couple of years through massive discounts offered by online ecommerce portals. The advantage was that these online ecommerce portals were outside the tax bracket. With the implementation of GST, that could change. The GST Council has already clarified that those online ecommerce platforms that were not paying taxes currently will be brought under the GST ambit. That means online sellers will not be able to pass on huge discounts to online shoppers. While you can complain that your discounts will go away, it will be a fairer scenario for the brick and mortar players including your neighbourhood grocer and baker.
 
Small businesses will have an incentive to enter the organized segment
 
The concern under the GST was that small traders and businesses will be brought within the ambit of GST putting unnecessary compliance strain and adding to their costs. The GST Council has clarified that the basic exemption limit for GST will be set at Rs.20 lakhs per annum. That means, traders and small businesses with annual turnover of up to Rs.20 lakhs will not be subject to GST. This will help millions of small traders and small businesses stay out of the ambit of GST and save costs of compliance. What needs to be understood here is that it offers a big opportunity for small businesses to graduate into the organized segment and get the benefits of a larger market and bank credit. This will be a big boost to them.
 

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