The GST effect

The GST effect

India's biggest indirect tax reform in the last decade has been the Goods and Services Tax that was implemented in 2017. And even though it has had teething issues like confusing and cumbersome filing processing, fluctuations in slabs, demands for rate cuts etc., financial experts will tell you that the Goods and Services Tax works well in the long run. We may see some immediate changes from this indirect reform, but the best is yet to come. This article outlines what we call the GST effect.

From helping mitigate cascading taxes to helping India rise up the Ease of Doing Business Index, GST has done a lot for the Indian economy in the last two and half years. But there are also some unseen advantages that are making experts take a second look at the hidden potential of this indirect tax form. Let's take a look at the current benefits of the GST system.

Mitigating the cascading tax effect
It was not uncommon for a product to become exceptionally high priced by the time it would reach the consumer, mainly because of the cascading tax effect. This effect occurs when a product is taxed on every stage of production until it is finally sold to the customer. Each succeeding transfer of the product is taxed inclusive of the taxes charged on the preceding transfer leading to inflated end prices. Such a practice ended with the introduction of the Goods and Services Tax. The GST system introduced an input tax credit structure to disallow clubbing and cascading of taxes and levied tax only on the value of the product or service. Yes, it did lead to an initial rate of inflation in some markets like the hospitality industry, but it also led to the lowering of prices in the consumer durables market.

One nation, one tax
With the introduction of single indirect tax reform, the Goods and Services Tax integrated different tax lines including Central Excise, Service Tax, Sales Tax, Luxury Tax, Customs Duty etc. into a consolidated tax system. That being said, the GST system is still a work in progress, especially in this area. Centre-State differences and attempts to reduce the effort to reduce the inflationary impact of the indirect tax reform has led to the introduction of multiple tax rates for both goods and services - mainly because economic progress in Indian states has never been uniform. This is likely to see improvement and uniformity as the years progress.

Easy inter-State movement
India's largest customers have been their own people, which is why domestic imports and exports greatly benefited by the introduction of the goods and services tax. The restrictions and taxes levied on the inter-State movement lifted after the implementation of GST. Truckers don't have to stop at every state, city and town border and pay octroi anymore. This has even resolved the issue of separate warehousing for the logistics industry leading to the faster and efficient movement of goods in the country.

Ease of doing business
From 142nd in 2014 to 63rd rank as of October 2019, India has come a long way on the Doing Business Index, and the indirect tax system has played a significant role in helping the country achieve this goal. Bottlenecks in tax compliance, registration of VAT, dealing with tax authorities, excise customs etc. we're just some of the kinks that were ironed out by the implementation of the Goods and Services Tax.

Tackling tax leakage
Because the GST network is set up online, taxpayers are required to register, file returns and pay their taxes without having to interact with tax authorities, thereby eliminating any under the table bribery to evade tax. A robust invoice checking mechanism also helps match invoices with the buyer and supplier, thereby disallowing fraudulent input tax credit claims.

As we mentioned, this is still a work in progress, and the full potential of the Goods and Services Tax is yet to be realized. One area of progress that will truly show us the hidden potential of this indirect tax reform is the use of artificial intelligence and machine learning and employing automation systems not just for efficient filing of taxes but also as a measure to curb evasion.

Baby steps into digital transformation
India is taking steps to enter the digital world, and the Goods and Services tax is playing a significant role in helping India stay on this path. The introduction of GST 2.0 viz. New Returns System clubbed with e-invoicing, possible integration of FASTag, and the e-way billing system will help the country realize what one nation, one tax means.

The New Returns System will employ the use of automated systems to populate nearly 80% of filing data - this means the scope of human error while filing returns will be greatly reduced. This will also mean fewer cases of data reconciliation and faster processing of input tax credit (a major pain point for some industries). Additionally, the introduction of e-invoicing will help validate invoices that can directly be shared with the returns system as well as the e-way billing portals, thereby reducing the need for multiple data entry. With manual and mundane tasks given the boot, tax authorities can look at productive solutions to streamline the payment of taxes.

With machine learning, India can bring about stringent measures to curb tax leakage and evasion. The Government is currently looking at invoice, and input tax credit matching using AI tools and any instances wherein returns have a mismatch of more than 10% are being red-flagged for identification and inquiry. These measures can actually help India recover the money it is losing to tax fraud and possibly help the Government reach its revenue targets.

We won't say that the GST system has worked wonders upon the indirect tax system in India, but it is definitely expanding avenues for a streamlined and efficient taxation system. In another five years or so, this system should start to realize its power and its potential to revolutionize our economy. 

Recent posts
Tax planning for business expansion in the U.S.: Best practices for Indian startups in 2024
U.S. sales and use tax guide for SaaS businesses in India
Market entry playbook: Launching your brand in the U.S. tax landscape

Prepare your business for e-invoicing under GST

Discover how to meet all compliance requirements while integrating e-invoicing into your tax function.

Prepare your business for e-invoicing under GST

Stay up to date

Sign up for our free newsletter and stay up to date with the latest tax news.