India is a developing country that brings economic reforms from time to time and marks its place in the world and international market by growing the economy. One such reform that turned out to be one of the most significant reforms in economic history is the introduction of Goods and Services Tax (GST). There has been major growth after the implementation of GST in the Indian market. But with merit, there comes demerit too. This blog will discuss in brief about the GST Registration impact on Indian economy.
Overview of GST Registration in India
Before GST, there were so many other taxes in the earlier regime like VAT – Value-Added tax, Central excise duties, Custom duty, Central sales tax, luxury tax, service taxes, entry taxes, and so on. GST replaced the complete web of indirect taxes. GST is a form of indirect taxation that’s levied on goods and services across the country. It is a unified, multistage, destination-based tax and GST was introduced in India in 2017. This has led to an increase in tax compliance and formalization of the economy and national market.
In India, talks about GST started in the early 2000s when a committee was set up for this purpose. But only in 2017, the law was introduced in both houses of parliament and it came into effect on 1st July 2017.
The essence of GST lies in its simplicity and uniformity; it replaced a complex web of taxes with a single tax, applicable across the nation. GST operates on a dual model, dividing the tax collection responsibilities between the Central and State Governments. Central Goods and Services Tax (CGST) is collected by the Central Government, while State Goods and Services Tax (SGST) is collected by the respective state governments on intra-state supplies and intrastate sales.
Additionally, there is an Integrated Goods and Services Tax (IGST) levied on inter-state transactions and interstate sales. This structure ensures a seamless flow of tax revenue between the center and the states. There are various impacts of GST.
Objectives Behind Introducing GST
– The main objective behind introducing GST is to bring a uniform or unified taxation system to our country. The aim is clear from the fact that GST has replaced various other indirect taxes and previous indirect tax regimes that were in existence under previous tax regimes.
– To reduce the burden on the taxpayer regarding all the compliances. Before, there were various other taxes. The state governed some and some by the center. To subsume every indirect tax into one and reduce the burden of taxpayers, GST was brought.
– Under the previous tax regime, there was a concept called the cascading effect where the taxpayers paid taxes indirectly two times for the same things. To remove that, a new taxation system was needed. This is one of the primary objectives of GST implementation.
– Because of various complications in the previous taxation system, and due to the complexity, there was tax evasion. To curb that, GST is helpful. Under GST input tax credit can be claimed only under tax invoices uploaded by the respective suppliers. It reduces cheating and fake invoices.
– To help the taxpayers, online filing and procedures are made available.
– Due to the reduced cascading effect, there is an increase in consumption and that has led to higher revenue.
Significance of Registering under GST
There is a threshold limit under GST, and if a business reaches it, it has to do compulsory registration. A business that registers under GST will be given a unique number that has to be used for other online proceedings or compliances. There are various significance in registering GST,
- Once a business registers under GST, it shows the credibility and legitimacy of the business. The clients and other people who want to do business with them will see the genuineness of fulfilling their tax obligation.
- By registering under GST a company can also collect and claim input tax credits it has paid on its outgoing. One can claim a refund of their input like services, or goods against their output like sales.
- GST registration also helps to reach a much wider customer or client base as many corporations and companies are acquired to do business only with a registered supplier. Also, it serves as an assurance to such corporations or companies that the person is carrying out the business legitimately and does all the tax compliances.
- Lesser compliance is one of the significances of GST registration. The business can file a GST return which will list out the GST that has been accrued and paid and also details about input tax credits claimed.
- Businesses that register for GST also have other benefits and certain government schemes that boost the business and help it easy to carry on business in a heavily competitive market.
Economic Impact of GST Registration
Here are some points that states the economic impact of GST registration:
1. Boost to Formalization of the Economy
Before GST, many businesses were functioning under the informal sector outside the purview of GST. But after GST implementation a threshold limit was set up exceeding which a business should register under GST. This forced all the small-sized and medium-sized businesses to register under GST too to enter into a more organized sector. GST also provides a compelling incentive to businesses that register under it and function within a formal economy. By doing so, they have access to a much more organized sector, tax credits, and other benefits.
2. Simplifying Tax Structure
GST’s biggest selling point is that it curbs the cascading effect that was prevailing in the previous tax regime. Before GST, the taxpayers had a problem of double taxation, where they had to pay taxes again on the taxes paid already on inputs, and the entire process was complicated. This along with increasing the tax liability, also leads to a complex structure of taxation system. But under GST, the taxpayers can claim a refund of the inputs paid which allows business to reduce their tax liability.
3. Expansion of the Tax Base
Before GST, many businesses functioned outside the sector of taxation i.e. informal sector of taxation leading to revenue leakage of the government. The mandatory registration when the threshold limit is met under GST has compelled many businesses to register under GST and come under the purview of the tax net. This led to the income of more businesses into the formal sector which pays tax thus leading to an increase in additional revenue for the government which can be used for other purposes like infrastructure, healthcare, development, education, etc.
Benefits of Businesses
GST offers various benefits to businesses in India, irrespective of their size or industry. One of the most significant advantages of GST is the claiming of an input tax credit scheme. Businesses registered under GST can claim a refund of inputs like goods, and services against the output paid like sales. That is, businesses can set off the tax paid on input against the tax liability on output. It also helps to prevent double taxation and make sure a business is not taxed twice for the same thing.
For manufacturers, traders, and service providers, ITC is a game-changer. It reduces the overall cost of production and operations, leading to price competitiveness. Businesses can pass on these benefits to consumers by offering more reasonably priced goods and services.
The implementation of GST has streamlined the supply chain in India. It has reduced the need for check-posts and eliminated the necessity for businesses to comply with a complex web of state-specific regulations. Consequently, the logistics and transportation of goods have become more efficient.
The GST regime also encourages businesses to optimize their supply chain operations, reducing inventory carrying costs and improving overall efficiency. This, in turn, has a positive impact on the cost structure and profitability of businesses.
Impact on Consumers
GST registration not only benefits businesses, it also has a direct impact on consumers. Before GST, the complexity of taxation led to hidden taxes and price fluctuations. With GST’s simplified tax structure and transparent pricing, consumers can make informed decisions.
Also, the implementation of GST has removed the cascading effect which prevents the consumers from bearing the burden of multiple layers of tax which in turn increases the price stability too. Reduction in the tax burden on consumers has a positive impact on consumers because of its transparency and efficiency.
GST has played a crucial role in creating awareness in the minds of consumers. The introduction of GST led to the clear mention of price tags, with GST components displayed. This made the consumers aware of the taxes they were paying, thus fostering a culture of financial literacy.
The customers now are well equipped to understand the GST implications and this transparency helps the consumers to make much more informed and reasonable purchasing decisions.
Challenges and Concerns
One of the primary challenges of GST registration has been the compliance burden on small businesses. For micro and small enterprises, the complexities of GST compliance for businesses can be overwhelming. Filing returns, maintaining records, and adhering to GST rules and regulations can be resource-intensive and time-consuming.
The government has introduced simplification measures to address this concern such as the composition scheme, which allows small businesses to pay a flat rate of tax and reduces their compliance burden. Additionally, the threshold for mandatory GST registration has been increased to provide relief to smaller businesses.
GST introduced multiple tax slabs, with different rates for different goods and services. The reason behind such distinction is to categorize essential commodities and luxurious commodities, but this, in turn, has led to so many complications and disputes. There have been calls for further rationalization of the GST rate structure to simplify it and reduce the number of tax slabs. Simplification will help reduce complications and classification-related issues.
Government Initiatives and Reforms
The Indian government has been actively working to address the challenges and improve the GST system. Some notable initiatives and reforms include:
-The introduction of E-invoicing is one of the most significant technological developments. It aims to reduce tax evasion, improve compliance, etc. It involves the electronic generation and reporting of invoices reducing manual errors and fraud.
-The government has promoted digital tax filing to simplify the process for taxpayers such as E-way bills, etc. Online platforms and digital tools have made it easier for businesses to file GST returns and comply with tax regulations. This move towards digitization has not only reduced paperwork but also enhanced the efficiency of the tax administration.
FAQs
1. What is GST registration, and why is it important for businesses in India?
-GST registration is the process by which businesses become legally recognized under the Goods and Services Tax (GST) regime. It is essential for businesses as it allows them to collect GST from customers, claim Input Tax Credit (ITC), and operate within the formal economy, among other benefits.
2. How does GST registration contribute to the formalization of the Indian economy?
-GST registration compels businesses to come under the tax net, reducing the prevalence of the informal sector. This formalization leads to increased transparency, accountability, and compliance with tax regulations.
3. What is Input Tax Credit (ITC), and how does it benefit businesses?
-ITC is a mechanism under GST that allows businesses to claim a credit for the tax paid on inputs (raw materials, goods, and services). It reduces the overall tax liability, leading to cost savings and enhanced competitiveness.
4. How has GST simplified the tax structure in India?
-GST has simplified the tax structure by replacing multiple state and central taxes with a single, unified tax. The elimination of the cascading effect of taxes and the paperwork reduction has made tax compliance more straightforward for businesses.
5. How does GST affect consumers in India?
-GST benefits consumers by bringing price stability and transparency. It eliminates hidden taxes and provides clear pricing information. Additionally, increased consumer awareness about taxes helps individuals make informed purchasing decisions.
