GST implementation in India: challenges and impact

Arihant Jain,

National Law University, Delhi

Introduction

Implementation of GST in India in 2017 was a very significant moment in Indian taxation history. It was a shift towards a comprehensive, unified, multistage indirect taxation system. It eliminated the need for most of the other taxes levied on goods and services in India. It is imposed at every step in the production process, from the initial manufacturing stage all the way to final consumption. It was first introduced in France and was gradually adopted by several countries like Spain, South Korea, the UK, Canada, etc. in due course of time. In India, GST replaced about 8 central taxes and also subsumed many state taxes.

Structure of GST in India

GST in India follows a four-tier tax designed to simplify indirect taxation with rates of 0%, 5%, 12%, 18%, and 28% [1]. This simplified taxation system aims to shape indirect taxation in the right direction and also promote ease of doing business across the country. It keeps essential goods affordable while imposing higher taxes on luxury items. Understanding this tax structure is important for businesses and consumers, as it affects their requirements and pricing strategies. The 0% tax rate covers basic necessities that we use in our daily lives, such as food and vegetables, while the 5% bracket includes common goods like tea and coffee. Most of the goods and services are taxed either 12% or 18%, and the 28% rate targets luxury and certain harmful goods like liquor, which may incur additional taxes. The tax rate on some special items like precious stones is 0.25% and 3% on items like gold. The GST system in India has three main components: Central GST (CGST), which is collected by the central government on intra-state transactions; state GST (SGST), imposed by state governments on the same transactions; and integrated GST (IGST), which applies to inter-state transactions and is collected by the central government before being distributed to the respective states. Additionally, Union Territory GST (UTGST) applies to transactions within union territories[2]. This structure eliminates the cascading effect of taxes, creates a unified national market, and facilitates business operations across state lines. With dual GST, it is naturally a matter of concern which component of GST is applicable to whom and when. To determine this, it is first important to ascertain the location of the supplier of the goods or services and the consumer. Location defines whether a combination of SGST and CGST will be applicable or only IGST.

Challenges in GST implementation

The process of implementation of GST in India is suffering from numerous challenges[3]. The complex structure of the multiple tax slab system poses challenges for businesses like small and medium enterprises (SMEs) in following and adhering to the diverse regulations. Many people didn’t understand the GST system fully, making it more complex. Educating businesses, tax professionals, and the public about GST became a significant challenge. It was essential for everyone to collaborate to share this knowledge effectively. Small traders also faced many other challenges, like limited resources for compliance and the disproportionate impact of compliance costs on their profit margins. One of the major challenges related to GST implementation in India is related to tax refund fraud. GST is a self-assessed tax that involves many invoices throughout the production process, so strong checks and robust control mechanisms are very important. Refunds are particularly risky for fraud. For example, in the case of the European Union, when they removed internal borders for VAT, it led to widespread cheating that harmed their tax collection. India might face a similar risk with GST if the responsibility for checking and auditing taxes is split among different states instead of being managed centrally. To avoid this, India needs to have a well-coordinated system to spot and stop potential tax fraud across the country. Transitioning to a fully digital tax is required to fill gaps in the digital skills of the major population of the country, and it also requires huge investment in technology. Developing strong IT infrastructure is important for tracking transactions and handling tax refunds quickly. It also needs to connect different states so they can easily share and check information. GST was a new idea for a country like India, so everyone working in tax offices, from local to national levels, needed to learn about it. They had to understand what GST is, how the laws work, and what steps to follow. GST is a consumption-based destination tax. This means that the tax will be collected in the state where the consumption occurs. All those states that are ahead in consumption and lagging behind in manufacturing are said to have benefited most from the introduction of GST. The Compensation Act was enacted to address this issue, yet it has only added to the complexity of calculating compensation.

Benefits of GST implementation

Besides challenges, implementation of GST in India has many benefits too. Introduction of GST increased transparency in the tax collection and also Certain essential goods and services in sectors like healthcare, education, and food grains are exempted from GST, which ensures affordability and accessibility. Certain industries in unorganized sectors that were unregulated in the previous tax regime, like textiles and construction, became regulated. GST has encouraged many businesses in the informal sector to register and join the formal economy. This happened largely due to the need for businesses to comply with GST regulations in order to claim input tax credits and engage in transactions with other GST-registered entities[4]. Before GST, movements of goods between states in India were like crossing many small countries. Each state had its own taxes and checkpoints, which made transporting goods expensive and slow. Companies had to keep warehouses in different states just to avoid paying extra taxes. The introduction of GST changed this all. Now, there is just one tax for moving goods across India, reducing the stops and paper work hurdles at state borders. It facilitated faster movement of goods across the country and now didn’t require many warehouses in different states. It also had many additional benefits, like efficient transportation and fewer requirements for transportation vehicles, which helped in saving fuel and lowering emissions. It also acted as a boost to rural areas, making businesses easier to reach in rural areas. It has also led to ease of doing business and expansion of trade and industry reducing the cost of doing business. It has significantly contributed to job creation especially for rural people. We can also see improvement in tax collection efficiency by the e-way bill system and invoice matching which made easier to detect tax evasion[5]. As India’s economy continues to develop, it is essential to address challenges and issues related to GST implementation for better economic growth and development.

Conclusion

In conclusion, the implementation of GST in India has brought about significant changes in the country's taxation system, with a four-tier tax structure aimed at simplifying indirect taxation. Despite challenges such as complexity and the need for education and technology investment, GST has also led to increased transparency in tax collection, regulation of previously unorganized sectors, and streamlined movement of goods across the country, positively impacting various industries and rural areas. As India continues to address challenges and refine the GST system, it is poised for further economic growth and development.

References

[1] Goods and services tax (India) (no date) Wikipedia. Available at: https://en.wikipedia.org/wiki/Goods_and_Services_Tax_(India) (Accessed: 15 September 2024).

[2] GST structure in India: Four-tier GST tax structure breakdown (2024) www.bajajfinserv.in. Available at: https://www.bajajfinserv.in/gst-structure-india#:~:text=GST%20in%20India%20is%20structured,goods%20attract%20higher%20tax%20rates. (Accessed: 15 September 2024).

[3] GST benefits – advantages and disadvantages of GST (no date) cleartax. Available at: https://cleartax.in/s/benefits-of-gst-advantages-disadvantages (Accessed: 15 September 2024).

[4] What is GST: Features, benefits & how does GST work (no date) Bank Of Baroda. Available at: https://www.bankofbaroda.in/banking-mantra/investment/articles/what-is-gst (Accessed: 15 September 2024).

[5]GST implementation in india not disruptive, best is yet to come. (2018, July 2). The Hindu. Retrieved from https://www.thehindu.com/business/Economy/gst-implementation-in-india-not-disruptive-best-is-yet-to-come-jaitley/article24304285.ece.