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GST and it’s impact on India’s GDP

GST

The GST or the Goods and Service Tax Bill, 2014 is Value Added Tax implemented in the country. The comprehensive nature of taxation will help in doing away with all the other indirect taxes which are currently levied by the government at the Centre and State. India being a federal republic, a dual taxation structure will be followed by the central and state governments, known as the Central GST and the State GST respectively.

  • Wider tax base: GST will take into account any taxes paid earlier in the goods/service chain. This will bring in additional revenue as the unorganised sector (currently not a part of the value chain) will be drawn into tax net. This will lead to huge tax collection.
  • Unified and simplified compliance- Large number of taxes imposed by the central government such as Central VAT, excise duty, central sales tax and state government taxes such as VAT on sales, entertainment tax, octroi, etc will be removed by single tax. This will create unified market thereby facilitating seamless movement of goods across states.
  • Reduce classification disputes

The GST taxation structure follow destination principle and thus the imports would be subject to GST while exports will be zero-rated. In case of inter-state transportation of goods, the tax would apply in the destination state instead of origin.

GST blog

One of the biggest benefits of implementation of GST will be seen in the logistics sector. Indian trucks which clocks around 280 km per day (on average) much below world average of 400 km per day will get a boost. The dismal performance of trucks is not due to poor roads or less fancy trucks but due to prevailing 11 categories of taxes which are levied on the road transport sector.

The ratio of indirect taxes to GDP in India increased from 3.99 per cent in 1950-51 12.7 per cent in 2008-09. However, it has fallen to 4.4 per cent in 2011-12. Export of goods and services as a percentage of gdp for India increased from 22 per cent in 2010 to 25.2 per cent in 2013. Implementation of GST which is zero-rated will result in increase of exports thereby further adding to exports. The revenue neutral GST rate of 10 per cent against the proposed GST rate of 25-27 per cent will further add to the tax receipts. Exports which grew at 13 per cent CAGR during 2010 and 2013 is expected to increase at around 6-8 per cent due to implementation of GST thereby further adding to GDP. Lastly, the GST will result in efficient allocation of factors of production (land and capital) thus resulting in overall price going down. Thus the real return to factors of production will go up. Finally, GST is expected, ceteris paribus, to increase India’s GDP by 1 to 1.8 per cent. The additional gain would be earned during years in future over and above the GDP growth achieved otherwise.

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