What are the Objectives and Benefits of the GST System in India?

The Goods and Services Tax (GST) is an indirect tax system introduced in India on July 1, 2017. It replaced multiple indirect taxes previously levied by the central and state governments, such as excise duty, service tax, VAT, and others. GST is a comprehensive, multi-stage, destination-based tax that is levied on every value addition in the supply chain of goods and services.

The introduction of GST was a historic reform in India’s indirect tax structure. It aimed to simplify the complex and fragmented tax system, reduce tax cascading, and create a common national market. Let’s explore the key objectives and benefits of the GST system in India.

Also Read-What is GST And Why Was It Introduced in India?

Objectives of The GST System in India.

The primary objectives of implementing the GST system in India were:

1. Simplification of the Tax Structure.

One of the main goals of GST was to simplify India’s complex indirect tax structure. Before GST, businesses had to deal with multiple taxes at the central and state levels, such as excise duty, service tax, VAT, entry tax, and others. This led to a complex web of taxes, making compliance difficult and increasing the cost of doing business.

GST subsumed most of these indirect taxes into a single tax, simplifying the tax structure. It reduced the number of compliances and made it easier for businesses to understand and comply with the tax laws. The simplified tax structure also made it easier for the government to administer and collect taxes.

2. Elimination of Tax Cascading.

Another key objective of GST was to eliminate the cascading effect of taxes, also known as “tax on tax.” Under the previous tax system, taxes were levied at each stage of the supply chain, and there was no mechanism to claim credit for taxes paid at earlier stages. This led to a cascading effect, where taxes were being paid on taxes, increasing the overall tax burden and the final price of goods and services.

GST addressed this issue by allowing input tax credit at each stage of the supply chain. Businesses can claim credit for the GST paid on their inputs and offset it against the GST collected on their outputs. This mechanism ensures that tax is only paid on the value addition at each stage, eliminating the cascading effect and reducing the overall tax burden.

3. Creation of a Common National Market.

Before GST, India’s indirect tax system was fragmented, with different tax rates and rules across states. This created barriers to inter-state trade and hindered the free movement of goods and services. GST aimed to create a common national market by harmonizing the tax rates and rules across states.

Under GST, there is a uniform tax rate for goods and services across the country. This has removed the need for businesses to maintain separate records for each state and has made inter-state trade easier. The creation of a common national market has boosted economic efficiency and competitiveness.

4. Broadening the Tax Base.

GST aimed to broaden the tax base by bringing more businesses and transactions under the tax net. Under the previous tax system, many small businesses were exempt from taxation due to high threshold limits. GST lowered these thresholds and brought more businesses into the formal economy.

The broader tax base has increased tax revenue for the government, which can be used for development and welfare purposes. It has also created a level playing field for businesses, as all businesses, regardless of size, are subject to the same tax rules.

5. Promoting Ease of Doing Business.

GST aimed to promote ease of doing business in India by reducing compliance costs and simplifying procedures. The online registration and return filing process under GST has made it easier for businesses to comply with tax laws. The input tax credit mechanism has reduced the working capital requirements of businesses.

The harmonized tax rates and rules across states have also made it easier for businesses to expand their operations and reach new markets. The overall impact of GST on ease of doing business has been positive, making India a more attractive destination for investments.

Benefits of GST System in India.

The implementation of GST has brought several benefits to the Indian economy, businesses, and consumers. Some of the key benefits are:

1. Simplified Tax Compliance.

GST has simplified tax compliance for businesses by reducing the number of returns and payments required. Under the previous tax system, businesses had to file separate returns for each tax and comply with different rules and procedures. With GST, businesses only need to file a single return and make a single payment, reducing the compliance burden.

The online registration and return filing process under GST has also made compliance easier and more transparent. Businesses can register, file returns, and make payments online, without the need for physical visits to tax offices. This has reduced the time and cost of compliance and has made the tax system more efficient.

2. Reduced Tax Burden.

GST has reduced the overall tax burden on businesses and consumers by eliminating the cascading effect of taxes. The input tax credit mechanism ensures that tax is only paid on the value addition at each stage, reducing the effective tax rate. This has led to lower prices for goods and services, benefiting consumers.

The lower tax burden has also made Indian goods and services more competitive in the global market. The reduced cost of production has made Indian exports more attractive, boosting the country’s export potential.

3. Increased Efficiency and Productivity.

GST has increased efficiency and productivity in the Indian economy by removing inter-state barriers to trade. The harmonized tax rates and rules across states have made it easier for businesses to move goods and services across state borders, reducing transportation costs and time.

The removal of check posts at state borders has also reduced delays and improved the speed of transportation. This has led to faster movement of goods and services, increasing the overall efficiency of the supply chain.

4. Boost to Economic Growth.

GST has provided a boost to economic growth in India by creating a common national market and increasing efficiency. The simplified tax structure and reduced compliance costs have made it easier for businesses to operate and expand, leading to increased investment and job creation.

The broader tax base and increased tax revenue have also provided the government with more resources for development and welfare purposes. This has led to increased spending on infrastructure, education, healthcare, and other sectors, driving economic growth.

5. Increased Transparency and Reduced Corruption.

GST has increased transparency in the tax system by digitizing the entire process. The online registration, return filing, and payment process has made it easier to track transactions and detect tax evasion. The input tax credit mechanism has also made it difficult for businesses to evade taxes, as they need to have proper invoices to claim credit.

The increased transparency has reduced the scope for corruption in the tax system. The online process has eliminated the need for physical interaction between taxpayers and tax officials, reducing the chances of bribery and harassment.

6. Benefits to Small Businesses.

GST has provided several benefits to small businesses in India. The composition scheme under GST allows small businesses with a turnover of up to Rs. 1.5 crore to pay a fixed rate of tax on their turnover, instead of the regular GST rates. This has reduced the compliance burden and tax liability for small businesses.

The online registration and return filing process has also made it easier for small businesses to comply with tax laws. The input tax credit mechanism has reduced the working capital requirements of small businesses, as they can claim credit for the GST paid on their inputs.

7. Increased Tax Revenue.

GST has led to an increase in tax revenue for the government by broadening the tax base and improving compliance. The number of registered taxpayers has increased significantly since the implementation of GST, leading to higher tax collections.

The increased tax revenue has provided the government with more resources for development and welfare purposes. This has led to increased spending on infrastructure, education, healthcare, and other sectors, benefiting the economy and the people.

8. Benefits to Consumers.

GST has provided several benefits to consumers in India. The elimination of the cascading effect of taxes has led to lower prices for goods and services. The input tax credit mechanism has ensured that the benefits of lower taxes are passed on to consumers.

The harmonized tax rates and rules across states have also made it easier for consumers to compare prices and make informed purchasing decisions. The increased transparency in the tax system has also reduced the chances of consumers being overcharged or cheated.

Challenges and Way Forward.

While GST has brought several benefits to the Indian economy, it has also faced some challenges in its implementation. Some of the key challenges are:

1. Technical Glitches: The online GST portal has faced technical glitches, making it difficult for businesses to file returns and claim input tax credit. The government has been working to resolve these issues and improve the functionality of the portal.
2. Compliance Burden: While GST has simplified the tax structure, it has also increased the compliance burden for businesses, especially small businesses. The frequent changes in tax rates and rules have also made compliance more difficult.
3. Revenue Shortfall: The implementation of GST has led to a shortfall in tax revenue for some states, as they have lost their power to levy certain taxes. The central government has been providing compensation to states for this revenue loss, but this is set to end in 2022.
4. Inverted Duty Structure: Some sectors, such as textiles and footwear, have an inverted duty structure under GST, where the tax rate on inputs is higher than the tax rate on finished products. This has led to a accumulation of input tax credit and has affected the competitiveness of these sectors.

Despite these challenges, the overall impact of GST on the Indian economy has been positive. The government has been working to address the challenges and improve the implementation of GST.

Some of The Steps Taken Include:

1. Simplification of Returns: The government has introduced a new simplified return filing system under GST, which is expected to reduce the compliance burden for businesses.
2. Reduction in Tax Rates: The government has reduced the tax rates on several goods and services to provide relief to businesses and consumers. The number of goods in the highest tax slab of 28% has been reduced significantly.
3. Compensation to States: The central government has been providing compensation to states for the revenue loss due to GST. This compensation is set to end in 2022, but the government is considering extending it for a few more years.
4. Addressing Inverted Duty Structure: The government has taken steps to address the inverted duty structure in some sectors by reducing the tax rate on inputs and increasing the tax rate on finished products.

Going forward, the government needs to continue working on simplifying the GST system and reducing the compliance burden for businesses. It also needs to address the revenue shortfall and find a sustainable solution for compensating states. The inverted duty structure needs to be addressed in a more comprehensive manner to boost the competitiveness of affected sectors.

Wrapping Up.

The introduction of GST in India was a historic reform that has transformed the indirect tax system in the country. It has simplified the tax structure, reduced the cascading effect of taxes, created a common national market, and promoted ease of doing business. The benefits of GST have been felt by businesses, consumers, and the economy as a whole.

While there have been some challenges in the implementation of GST, the government has been working to address them and improve the system. The simplification of returns, reduction in tax rates, compensation to states, and addressing the inverted duty structure are some of the steps taken in this direction.

Going forward, the Success of GST will depend on the continued efforts of the government to simplify the system, reduce the compliance burden, and address the challenges faced by businesses and consumers. With the right policies and reforms in place, GST has the potential to be a game-changer for the Indian economy, boosting growth, competitiveness, and ease of doing business.

C.K. Gupta

Hello, I am C.K. Gupta owner of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.