Impact of GST on Indian Economy

By | June 26, 2017

GST ImpactGST is expected to have a favorable outcome on Indian economy:

  • Removal of tax barriers with seamless credit will make India a common market
  • leading to economies of scale in production and efficiency in supply chain.
  • Removal of cascading effect of taxes embedded in cost of production of goods and services,
  • significantly reducing cost of indigenous goods and indirectly promoting ‘Make in India’.
  • Facilitating ease of doing business –
  • Integration of existing multiple taxes into single GST
  • will significantly reduce cost of tax compliance and transaction cost.
  • Stable, transparent and predictable tax regime to encourage local and foreign investment in India creating significant job opportunities.

Sectoral impact

Government has finalized and declared the exact rates applicable to particular goods. And services and this will likely apply from July 1, 2017. Hence, it is difficult to measure the exact impact across sectors. Based on the current tax rates (central excise and VAT) for key product segments across sectors and the proposed GST rates, we expect most sectors to gain or otherwise in a limited way.

As part of GST implementation,

  • Government fixes service tax higher
  • from the current levels of 14.5 per cent,
  • which will give negative influence
  • for service companies in airlines, telecom, insurance, etc., in terms of demand impact.

GST impact on various sectors:

  1. An important fallout of GST could be shift from unorganised to organised segment. The unorganised sector will come into the tax net. S it will lose the benefits arising from non-payment of taxes and levies. Thus, companies which are operating in sectors will high unorganised component will benefit in terms of increased demand. Companies in sectors like plywood, ceramic tiles, batteries, etc. will stand to benefit.
  2. 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, etc should benefit. FMCG companies could generate substantial savings in logistics and distribution costs as it will eliminate the need for multiple sales depots. FMCG companies pay nearly 24-25 per cent including excise duty, VAT and entry tax and a lower rate of 18 per cent could yield significant reduction in taxes. But a higher GST rate of 28 per cent for consumer durables and some FMCG products may disappoint the market. Warehouse rationalisation and reduction of overall tax rates, is expected to generate saving.
  3. Some automobile companies could gain from GST implementation if the GST rate on their products is 18 per cent and they are able to retain the benefits of lower rates. However, the higher rate of 28 per cent would be negative versus expectations.
  4. Services sector, like telecom could face marginally negative impact from the higher service tax rate of 18 per cent (likely) versus 15 per cent currently.

GST impact on Indian EconomyHowever, macro benefits emanating from implementing GST far outreach the negatives, it is also a significant change communicating to the world at large that we are focused on one path for economic progress. While the lower GST rates may lead to a decline in inflation, economic growth may not improve significantly in the short term. Even though it will benefit both India and the government in the medium term. Most economists forecast inflation to come down as Government hav fixed GST rates for most goods at a lower rate. While GST is unlikely to be a “positive” for economic growth in the short term, the reform will improve the ease of doing business.

GST impact on Indian economy:

    1. Improve export competitiveness: Indian exports which have long suffered from lack of international competitiveness due to differential taxes and the energies expended on complying with the complex tax labyrinth. A 2010 report from National Council of Applied Economic Research had found that eliminating cascading taxes on exports could increase GDP growth by 0.9-1.7 per cent.
    2. Boost FDI investment in India: Market experts believe that the implementation of the new tax structure of Goods & Service Tax (GST) will lead to increase tax compliance and attract more foreign direct investments across sectors due to tax transparency and ease of doing business.  This is in turn, is expected to improve business transparency. And it will create a trust-worthy bond between corporates and the government.
    3. Increase in value of Indian rupee: After the implementation of Goods and Services tax, and Make in India campaign, foreign investments into the country would be given a hike. Lower taxes and increased GDP would further better the rupee rate. Introduction of prudent economic policies by the government has given an opportunity for the foreign companies to invest in India. Lower rates of exports would retain the Indian rupee in the country itself.
    4. Push GDP growth: The great holy grail of economic policy is to find something which increases the efficiency of the economy as a whole. There aren’t that many such things around but the introduction of GST in India this summer is one of them. And it’s that which has the International Monetary Fund stating that the GST will push India’s GDP growth rate.

Thus, experts expect the implementation of GST to bring in the much-needed boost to the nation’s economy.

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