Impact of GST on GDP of Indian Economy

IJIRT 158842 INTERNATIONAL JOURNAL OF INNOVATIVE RESEARCH IN TECHNOLOGY 278

Impact of GST on GDP of Indian Economy—A Study

Dr.N.L.Vijaya

Assistant Professor, Department of Commerce, Government College for Women, Kolar – 563101,

Karnataka

Abstract: A Tax is a mandatory financial charge or some

other type of levy imposed upon a tax payer by the

governmental organization in order to fund various

public expenditures. Governments use different kinds of

taxes and vary tax rates. They do this in order to

distribute the tax burden among individuals or class of

people. To create a tax system, a state must make choice

regarding the distribution of tax burden. GST is levied

on all transactions such as sale, transfer, purchase,

barter, lease, import of goods and services. It is a

consumption-based tax, taxes are paid to the state which

the goods or services are consumed not the state in which

it is produced. The main intention is to avoid the double

taxation system and to eliminate cascading effect of tax

in our country.

Since GST is a transformational tax reform in our

country since independence, it has a huge impact on GDP

of our economy. This paper tries to study such invariable

effect of GST on GDP and its consequences on the overall

business activities. GST can be termed as “one Tax, one

Nation and one Market”. GST is highly compliance

driven law.

Key Words: Tax, GST, GDP, Indirect Tax, cascading

effect

INTRODUCTION

Goods and Services Tax (GST) is a system of indirect

taxation in India merging most of the existing taxes

into single system of taxation. GST would be

comprehensive indirect tax on manufacture, sales,

consumption of goods and services throughout India,

to replace taxes levied by the central and state

governments.

The GST is consumption based tax levied on the

supply of goods and services based on the input tax

credit method. This method allows GST-registered

business to claim tax credit to the value of GST they

paid on purchase of goods or services as part of their

normal commercial activity. Taxable goods and

services are not distinguished from one another and

are taxed at a single rate in a supply chain till the goods

or services reach the consumer. GST can be termed as

“One Tax, One Nation, One Market”.

Table showing how GST works

Stage of supply

chain

Purchase

value of

input

Value

addition

Value at which supply of

goods and services made

to next stage

Rate

GST

GST on

Output

Input

tax

credit

Net GST=GST on

output-input credit

tax

Manufacturer

100

130

10%

13-10=3

Whole seller

130

150

10%

15-13=2

Retailer

150

160

10%

16-15=1

OBJECTIVES OF GST

• To eliminate cascading effect of tax

• To improve competitiveness of original goods and

services thereby improving GDP of the country

• To ensure the availability of input credit across

the value chain

• To reduce the complication in tax administration

and compliance

• To have unified law involving all the tax bases,

laws and administration procedures across the

countries

• To reduce unhealthy competition among the states

due to tax and revenues

• To reduce the tax slab rates to avoid the further

clarification issues

Need for Goods and Services Tax:

• Simpler tax structure

• Eliminates cascading effects of the tax

• Increased revenue

• Technology driven system

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Gross Domestic Product (GDP)

The gross domestic product (GDP) is one of the

primary indicators used to gauge the health of a

country's economy. It represents the total dollar value

of all goods and services produced over a specific time

period; you can think of it as the size of the economy.

Usually, GDP is expressed as a comparison to the

previous quarter or year. For example, if the year-to-

year GDP is up 3%, this is thought to mean that the

economy has grown by 3% over the last year. The

United States has a GDP of $18,869.4 billion as of the

fourth quarter of 2016, according to the Bureau of

Economic Analysis.

GST Positive Impact of GDP

There will be one tax rate for all which will create a

unified market in terms of tax implementation and the

transaction of goods and services will be seamless

across the states.

The same will reduce the cost of transaction. In a

survey, it was found that 10-11 types of taxes levied

on the road transport businesses. So the GST will be

helpful to reduce transportation cost by eliminating

other taxes.

After GST implementation the export of goods and

services will become competitive because of nill effect

of cascading effect of taxes on goods and products. In

a research done by NCAER it was suggested that GST

would be the key revolution in Indian Economy and it

could increase the GDP by 0.9 to 1.7 percent. As

speculated earlier, the tax experts can now assume that

the growth will be around 1 to 2 percent after the

implementation of the GST.

GST will be more transparent in comparison to the

existing law provision so it will generate more revenue

to the Government and will be more effective in

reducing corruption at the same time.

Overall GST will improve the tax Compliances.

In a report issued by the Finance Ministry, it was

mentioned that Make In India programme will be more

benefited by the GST structure due to the availability

of input tax credit on capital goods.

As the GST will subsume all other taxes, the

exemption available for manufacturers in regards of

excise duty will be taken off which will be an addition

to Government revenue and it could result in an

increase in GDP.

The GST regime has although a very powerful impact

on many things including the GDP also. The Gross

Domestic Product has the tendency to loom on the

shoulders of revenue generated by the economy in a

year. Still, a worthwhile point includes that the GST

has the capability to extend the GDP by a total of 2

percent in order to complete the ultimate goal of

increasing the per-capita income of every individual.

Also, the GST scheme will certainly improve the

indirect revenues to the government as the tax

compliance will be further enhanced and rigid,

extending the tax paying base which will add to the

revenue. The increased income of the government will

redirected towards the developmental projects and

urban financing creating an overall implied scenario.

GST Negative Impact on GDP

As the GST rates are 5%, 12%, 18% and 28% and if

the GST rate on service will be finalized at 5% or 12%

then cost of services will get reduced while in else case

if the rate will be 18% or 28% on services then services

will become costlier and it will lead to inflation for a

short period.

In a report, DBS bank noted that initially GST will

lead to rise in inflation rate which will remain for a

year but after that GST will affect positively.

GST will applicable in the form of IGST, CGST AND

SGST on the Centre and State Government, but some

economists say that there is nothing new in the form

of GST although these are the new names of Central

Excise, VAT, CST and Service Tax etc.

As every coin has two faces in the same way we tried

here to familiarize the things related to GST with both

perspective i.e. positively and negatively in this

article. Despite having some factor which is being

expected to affect the Economy adversely there are so

many other things which are expected with a positive

impact on GDP.

OBJECTIVE OF THE STUDY

• To study Goods and Services Tax (GST) and

Gross Domestic Product ( GDP)

• To analyze the impact of GST on GDP

SCOPE OF THE STUDY

The study is confined to analyze the impact of GST on

Indian GDP and it does not cover any other area.

METHODOLOGY

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The study is based on secondary data. GDP of the

previous year’s last quarter and current year’s first

quarter has been analyzed for comparison.

Analysis and Interpretation

In India, the growth rate in GDP measures the change

in the seasonally adjusted value of the goods and

services produced by the Indian economy during the

quarter. India is the world’s tenth largest economy and

the second most populous. The most important and the

fastest growing sector of Indian economy are services.

Trade, hotels, transport and communication;

financing, insurance, real estate and business services

and community, social and personal services account

for more than 60 percent of GDP. Agriculture, forestry

and fishing constitute around 12 percent of the output,

but employs more than 50 percent of the labor force.

Manufacturing accounts for 15 percent of GDP,

construction for another 8 percent and mining,

quarrying, electricity, gas and water supply for the

remaining 5 percent.

India GDP growth rate slumps to 5.7 percent in the

second quarter of 2017, below 6.1 percent in the

previous period and market expectations of 6.6

percent. It remains the weakest growth rate since the

first quarter of 2014 due to a slowdown in consumer

spending and exports. On the production side,

manufacturing and agriculture eased. Figures for the

second quarter of 2017 mark the third consecutive

period of slowing growth, following the

demonetization program started in November of 2016

that removed 86 percent of India's currency in

circulation.

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1. India GDP growth rate slowed to 5.7% in Q1 of

2017-18 on the back of destocking ahead of GST

implementation and the lingering impact of

demonetization.

2. Note ban curtailed cash availability, slowing

consumption and hurting cash sensitive sectors

like construction, trade, logistics, and small and

medium size enterprise.

3. Private consumption slowed from the March

quarter, investment demand turned positive in the

June quarter after contracting in the previous

quarter.

4. Uncertainty related to the GST rollout on 1 July,

which came about eight months after the

government cancelled 86% of the currency, saw

manufacturers cutting production and dealers

offering discounts on items such as cars. As a

result, manufacturing growth slowed in the June

quarter.

5. Trade, hotels, and transportation, impacted by

demonetization in the March quarter rebounded to

grow, mostly due to discount sales ahead of GST

implementation.

6. The central bank’s annual report reiterated its

forecast for gross value added (GVA) to grow at

7.3% in 2017-18, as against 6.3% in 2016-17.

GVA, which is arrived at deducting net indirect

tax from GDP, grew 5.6% in the June quarter, the

same as in the March quarter.

7. The report flagged risks such as an over-leveraged

corporate sector and a stressed banking sector,

because they could delay private investment

demand revival. It also noted that farm loan

waivers could add to upward pressures on

inflation.

8. Two recent policy measures --demonetization in

November 2016 and GST rollout in July 2017 had

a short term impact on economic activity and

aggravated the already slowing momentum.

9. The second half of this financial year is expected

to witness an improvement in trend growth as

impact of demonetization is gradually fading,

with the fallout from GST likely to extend to the

September quarter before fading out

CONCLUSION

• GDP rate has considerably decreased after

demonetization

• Soon after demonetization, implementation of

GST has further affected drastically on GDP

• Decrease in the cash production and non

availability of cash for certain period has reduced

GDP rate

• The effect of GDP on Production sector is one of

the main reason for considerable downfall of GDP

rate

• The confusion prevailing in the general public has

affected the growth rate

• This present effect is for short term and is

expected to improve in the future and will result

in the increase of GDP rates.

REFERENCE

[1] Goods and Services Tax – B.Mariyappa,

Himalaya Publishing house

[2] GST impact on GDP of India-C.S.Vijay Jha

[3] www.rbi.org.in

[4] www.investopedia.com