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Impact of GST on Various Macroeconomic Variables

Ms. Suhasini Durve,


Asst. Professor,
Bhavan’s Hazarimal Somani College,
Chowpatty, Mumbai- 400004
___________________________________________________________________________
​ABSTRACT
With the 101​st Constitution (Amendment) Act, 2017 passed, the GST was adopted on 1​st July,
2017. The GST has replaced the existing indirect taxes and is levied on each point of sale.
The objective of the study is to analyse the short term and long term effects on different
macroeconomic variables. The new tax regime has resulted in different positive or negative
effects on trade and commerce. The implementation of GST has led to a temporary
bewilderment ​in the markets and it is very important to understand the effects of GST on
Gross Value Added, employment rate, General Price Level, etc. The study uses secondary
data from various reports of Government of India and other news sources.

Keywords: indirect taxes, GST, GNP, Kelkar Committee, GST council, destination based tax.

INTRODUCTION
The tax is a major source of public revenue. The main features of taxation are that, they are
the compulsory payments made by an individual or entity to the administrators for carrying
out their socio-economic functions. The indirect taxes among the different kinds of taxes,
cover a wider range of tax base. The changes in aggregate demand depends on the rate of
taxation and the structure of tax system and so the economic growth. More complex and and
unclear the tax system is, greater are the chances of tax evasion and inadequate revenue
generation. This complexity also affects the ease of doing business. A economic, transparent
and simple system is thus promised by the Government of India through the implementation
of GST.
The Goods and Service Tax (GST) is a destination based tax incorporates all the other
existing indirect taxes. Introduction of GST has brought in a comprehensive single tax
structure for the economy. The burden lies with the final consumer. The taxpayer will be
paying only the tax on the value added and will benefit from Input Tax Credit. GST has
helped to reduce the complexity of multiple tax regime that existed in India. ​The
implementation of GST by the Government of India has led to a situation of confusion for a
common man as the new amendment is not yet familiar to the public.The GST rates are based
on the classification of goods and services. 0%, 5%, 12%, 18% and 28% are the major slabs
of GST. The new system has discarded all the offline payment systems compulsorily, hence
the small scale sector and the illiterate and older population sections are finding it difficult to
adopt it.

REVIEW OF LITERATURE
Review of Literature refers to the evaluation of the already existing findings related to the
topic in question. The following reviews list the findings and opinions on the concept of GST
and its implications by different researchers.

Ahmad E. & Poddar S. (2009), GST reforms and intergovernmental Considerations in India,
have studied in detail about the limitations of the previous tax system and the need of the tax
reform. They have also gave the means of improving the tax system and the methods of
administering them.

Anbarasi A. & Rakshitha V. (2015), GST in India: A SWOT Analysis, have studied the scope
of GST, its expected workable pattern. Through the SWOT analysis they have concluded that
the GST will prove to be an efficient and transparent system also will help to remove the
distortions in the economy.

Singh S. (2017), GST (Goods and Service tax) Its Impact on Indian Economy, analysis the
effects of GST on the prices in various sector. According to the studies some of the goods and
services will become cheaper while for some other goods and services the prices will rise.
The paper also identifies the threat of reduced revenues of the States.

Gupta N. (2014), Goods and Service Tax: Its Impact on Indian Economy, the study along
with the analysis of the previous tax system and the GST regime has highlighted the benefits
of GST.
Kumawat, Paliwal (2015), Emergence of goods and services tax (GST) in India, have
discussed the features and various implications of GST. The paper studies the single tax
system in details.

Jangra A., & Narwal K. (2014), Application of CGE models in GST: A literature review,
have studied 21 research papers published from 1989 to 2012. The study of modern version
of Walraisian model highlights the welfare aspect of the GST.

Jasmine V. (2017), GST & Evolution of Tax System in India, focuses on the working of the
GST in India with a simple example. The paper studies in detail about the features of GST ,
its impacts and also gives suggestions to overcome the challenges faced in the adoption of the
new system.
The above mentioned research papers conclude that the GST is a efficient and transparent
indirect tax system as compared to the previous multi tax system. They have highlighted its
advantages and also suggested measures to correct the difficulties in the implementations of
GST.

RESEARCH METHODOLOGY
The study uses secondary data to understand the concept of GST, its features and the
implications on macroeconomic variables such as national income, employment, ease of
doing business, Industrial Production Index, general price level, etc. The study has analysed
the data from various publications and reports of Government of India and other publishers.

OBJECTIVES OF THE STUDY


1) To understand the concept of GST.
2) To study the Phases of implementation of GST
3) To study the impacts of GST on various macroeconomic variables in long run and
short run.
4) To analyse recent developments in the economy after the implementation of GST.

HISTORY OF GST
The concept of GST was first introduced by a German economist in 18th century. The first
country to adopt the GST regime is France. It is one of the most important and biggest fiscal
reform in India since 1947. The GST is not a new concept in India, in fact it has its roots back
in 1999-2000 when the first committee for drafting of GST law was set up by the then PM
Mr. Atal Bihari Vajpayee. The Taskforce on the implementation of FRBM Act, 2003 headed
by Vijay Kelkar envisaged the idea of implementing GST to achieve a wider tax base and
improve the revenue collection in 2004.In 2005 the then Finance Minister P. Chidambaram
spoke on the topic of GST in the budget session for the first time and then in 2006 he
declared deadline of 1st April, 2010 for implementing GST. In November 2009, the
discussion paper of the GSt Committee was put forward for public debate and inputs from
society. The Constitution Amendment Bill for implementation of GST was then introduced in
2010 as the proposed tax required alteration in the powers of Central as well as State
governments. After the continuous discussions the Standing Committee suggested
Amendments in the bill in August,2013. After the new government came to power in 2014,
the bill was introduced as 122nd Constitutional Amendment Bill, but was rejected by
RajyaSabha in 2015. After introducing the required changes the 101​st Constitution
(Amendment) Act, 2017 was passed in August,2017 and GST was adopted on 1​st​ July, 2017.

FEATURES OF GST REGIME


GST subsumes the existing indirect taxes viz. Central Excise Duty, Additional Excise Duty,
Service Tax, Additional Customs Duty commonly known as Countervailing Duty, and
Special Additional Duty of Customs at Central level. Also GST subsumes State Value Added
Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central
Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase
Tax, Luxury tax and Taxes on lottery, betting and gambling.
The concept of GST is primarily based on value added system, the the difference is paid back
in respect of previous level against the GST charged at the time of sale. The tax is constituted
of SGST at the state level and CGST at central level. The interstate trading will be charged
with IGST (Integrated GST). The GST council was set up after the GST bill passed, this is a
Constitutional body which has decision making power for subsuming taxes, goods and
services that can be exempted or to bring them under GST, threshold limit and rates,
providing special provisions for states, etc.
IMPACTS OF GST
The implementation of GST introduced major changes in the existing fiscal policies. The
impacts can be classified into Positive Impacts and Negative Impacts.

A) Positive Impacts of GST:


1) Removal of cascading effect of previous tax system. Where the taxpayers were paying
additional tax burden.
2) Uniformity of tax rate throughout the country.
3) Reduction of multiple taxes.
4) Widening of the tax base.
5) Free mobility of goods and services throughout the country.
6) Easy electronic tax compliance.

B) ​Negative Impacts of GST:


1) Complicated tax structure is created due to the Dual GST at center and state level. It
has become really difficult to coordinate with 29 states and 7 union territories.
2) States with manufacturing units are likely to lose the revenue generated by the
previous production destination based tax as GST is a consumption destination based
tax.
3) Rise in the rate of tax on services from 15% to 18% - 20% after GST, making services
more expensive.

RECENT TRENDS
According to the recent announcement by IMF, the Indian Economy will grow by 8% after
implementation of GST.
A) Effect on GVA
Figure 1

Various changes can be observed in various macroeconomic variables. Figure 1 represents


the changes in the growth rate after the implementation of GST. In the short run, the growth
seems to be slowed in the FY17 Q4 and FY18 Q1 to 5.6% which has then raised to 6.3% in
FY18 Q2.

Figure 2

The Figure 2 represents


the quarterly growth
rates according to the
sectors.

Effect on General Price Level


Figure 3
The Inflation is one of the important variable which also reflects the stability of the economy.
It can be observed that the Inflation has reached all time high in November, 2017.
Effect on Unemployment
In its World Employment and Social Outlook Report, 2017 United Nations International
Labour Organisation (ILO) has estimated employment rate to be 3.4 % for FY17-18. It is
speculated that GST will open a lot of job opportunities in the finance and commerce sector.

Arguments on GST
Bieng an important and biggest fiscal reform, GST has become a topic of constant debate.
There are experts according to whom GST has created disturbances in the market at a same
time the other group that believe that GST has improved the indirect tax system in India.
According to some economists the elimination of the cascading effect, complex tax system
has created a better tax regime which is easier, cost effective and efficient system.
The other faction argues that GST has increased the operational cost, the illiterate and older
population are finding it hard to work on an online system. They also highlight that the SMEs
are going to be burdened by taxes. GST at a same time has become economical as the sellers
will benefit from Input Tax Credit. It has become necessary for the small businesses to
register for GST for enjoying ITC leading to decrease in the production costs.

Conclusion and Suggestions


GST as mentioned in the earlier sections has created disturbance in the market as the people
are not clear about all the technicalities of the concept. Also being a inflationary type of tax,
GST has led to fall in the price of essential goods. At the same time the services have become
expensive. But at same time there are also the benefits generated through the new tax system
as discussed under negative impacts of GST. Following are the suggestions to overcome this
obstacles for the smooth functioning of the GST system.
1) The authorities must try to create awareness among the people.
2) Step by step integration of the tax slabs is required.
3) A justifiable sharing structure of the revenue between center and states is must as the
state governments are already under deficits and at a same time carry out major public
expenditure projects.

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Shaik S., S. Sameera, Sk. Firoz (2015) Does Goods and Services Tax (GST) Leads to Indian
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