GST in India: Implications for Businesses and Consumers

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Introduction

Goods and Services Tax (GST) is one of the most vital tax reforms ever introduced in the country. As of July 1, 2017, the GST rolled out to displace a group of indirect taxes, such as central excise duty, service tax, and state-level VAT, thereby merging all these indirect taxes into one single tax throughout the country. All these various taxes are being merged into a single levy. In this way, GST aims to make the tax system easy, increase efficiency in the economy, and have better compliance. The impact of GST on businesses and consumers has been profound as the transition hasn't been without its challenges. This article is to discuss the significant implications of GST for both business and consumer users in India. It talks about the positive implications as well as the challenges this new system faces.

What is GST?

GST is a destination-based tax on the consumption of goods and services. It is a comprehensive, multi-stage tax that applies to the value added at each stage of the supply chain. The four major components of GST are:

• CGST: Central GST, collected by the Central Government on intra-state sales.
• SGST: State GST, collected by State Governments on intra-state sales.
• IGST: Integrated GST, collected by the Central Government on inter-state sales.
• UTGST: Union Territory GST, applied to the Union Territories of India.

Almost all goods and services are under the purview of GST. Some are excluded, though. Its design objective is to obviate the cascading effect of taxes and provide seamless credit throughout the supply chain, besides fostering ease of doing business.

Implication on Businesses

Streamlined Tax Compliance

Before the implementation of GST, all businesses had to face the problem of interacting with many tax authorities at multiple levels, both at the central and state levels. In that scenario, it was confusing and cumbersome paperwork because different states had different tax rates and formats under which businesses had to comply. GST has streamlined the taxation structure by reducing the complexity of compliance.

Now, all businesses have a single tax authority and uniform application of tax laws throughout the country. GSTN has facilitated online returns, tax payments, and claiming ITC through a platform. It reduces the compliance burden of business firms, particularly the small and medium-sized ones who faced hassle and complications with the previous system.

Benefit of ITC

The most important advantage of the GST regime for businesses is the availability of input tax credit (ITC) on taxes paid on purchases. In the earlier system, businesses could not claim the entire taxes paid on inputs, and hence, it resulted in a cascading effect of taxes (tax on tax). Under GST, businesses can claim credit for tax paid on their inputs, whether goods or services, against the liability of paying their output tax. This aspect of the GST regime has brought down costs for businesses largely.

However, it is equally true that the companies will need to make sure that their suppliers are GST-compliant because an input credit is available only if the supplier has paid appropriate taxes. So, companies will have to keep a much more streamlined and organized method of tracking transactions and filing returns.

For Small and Medium Enterprises (SMEs)

For small and medium-sized enterprises, GST has been a mixed blessing. On the one hand, SMEs are now able to receive the input tax credit, which was otherwise not available to them under the VAT system. This helped their bottom lines reduce operational costs and therefore enhanced their competitiveness.

On the other hand, compliance with GST can be oppressive for small businesses, especially because they lack the wherewithal to manage and file such a complex system. To address this situation, the government has developed a composition scheme for small-scale businesses with an annual turnover below a certain specified threshold. The businesses will now make tax payments at a lower rate and file quarterly returns, which eases their compliance burden.

Higher Taxes for Certain Industries

While GST has diminished the cascading effect of taxes, it has also brought with it increased tax burdens on some industries. The hospitality and real estate industries, for instance, have borne increased taxes under the GST regime. The hospitality industry, which had previously faced a lower rate of service tax, now faces a higher GST rate. Similarly, the real estate sector has been adversely affected due to the application of GST on under-construction properties, which was not the case under the earlier VAT regime.

This has raised issues concerning the impact on these industries, especially higher prices for the end consumer and a potential decrease in demand. Developers and hoteliers have had to adapt to the new compliance requirements, which have caused some operational disruptions.

Impact on Logistics and Supply Chain Management

GST has transformed logistics and supply chain management in India. Before the advent of GST, distinct, separate inventories were required for intra-state and inter-state transactions because of the tax regimes that differed between states. This added operational complexity to logistics and thus increased the cost under the old tax system. Today, under GST, goods can be moved from one state to another without the requirement of multiple tax compliances in the supply chain.

However, the shift has required enterprises to invest in technology and infrastructure that accompanies the new system with initial costs. Besides, firms that were previously used to tax structures of specific states may have challenges in readjusting their logistics and distribution channels.

Consumer Implications

Lowering Prices of Most Goods and Services

Perhaps one of the biggest advantages that GST has for consumers is price cuts on numerous commodities and services. The old system had cascading taxes where costs were escalated to the end user because there was no proper input credit between the tax layers. Thus, with the advent of GST, the entire tax burden came down, reducing the prices of many products.

For instance, products such as smartphones, televisions, and household appliances have decreased in price because of the input tax credit mechanism, where businesses can pass on savings to consumers. Telecommunications and insurance services have also adjusted prices with the new tax system.

Increased Tax Burden on Some Goods and Services

While prices for most goods and services have been reduced under GST, there are some items that carry a higher tax rate now. That means that some people have to spend more on their living. For example, luxury goods like high-end automobiles and costly jewelry are now taxed at higher rates than before, causing higher prices for those goods.

Third, services such as air travel have seen higher GST rates than those applied under former taxes. Consumers who depend on these industries to get their needs met are bound to pay for the increased prices.

Greater Transparency and Reduced Corruption

GST has also led to increased transparency in the tax system as all transactions are now recorded on the GSTN platform. This has reduced opportunities for tax evasion and corruption since every business transaction is audited in real-time. Consumers reap from this higher predictability in pricing and quality of goods and services.

Consumer Experience Improvement

With a more organized and standardized tax system, consumers now enjoy a more efficient and seamless shopping experience. Businesses are compelled to issue GST-compliant invoices, and consumers can claim refunds on taxes paid in certain cases, such as the export of goods and services. This has streamlined the consumer experience, especially for businesses that deal with large volumes of transactions.

Challenges 

While GST has been a boon to India's economy, both for businesses and consumers, adapting to the new system has been a challenge, especially initially. For businesses, it is the initial learning curve, the cost of compliance, and adjusting to the new tax structure that has been challenging for some. For consumers, it is mixed in terms of affecting prices that have gone up for certain items, making them costlier, and for some, they have become cheaper.

Conclusion

This development, therefore, concludes the fact that GST in India is reshaping the business landscape and changing the behavior of the consumer by creating a unified, transparent tax system. Though various benefits are clear, such as reducing complexity, greater tax efficiency, and increasing compliance, for businesses and consumers, implications will continue to evolve over time as the system matures. It is hoped that with the current changes and adjustments made to the GST framework, the tax system will continue to fuel economic growth, enhance business competitiveness, and give consumers a fairer deal throughout the country.