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Impact Of GST (Goods And Service Tax) And Economic Growth In India

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Purakala ISSN: 0971-2143
(UGC Care Journal) Vol-31-Issue-11-April-2020

Impact Of GST (Goods And Service Tax) And Economic Growth In India

[Link] Rafee1 Asst. Prof. Saleena Desai2 Prof.S neha Singh3

1
Associate Professor, Department of Management, Brindavan College, Bangalore-63, India
2
Assistant Professor, Department of Management, Brindavan College, Bangalore-63, India
3
HOD, Department of Management, Brindavan College, Bangalore-63, India

Abstract: the objective of the study is to highlight the impact of GST on economic growth of India
which is said to be a one of major taxation reform post independence. The new reform has helped
the country to increase its GDP tax ratio on par with the global taxation system. The study
adopted exploratory research model based on past literature using information from research
journals, reports, news papers and magazine covering wide collections of academic literature on
India’s growth story post GST implementation. The study concludes that introduction of GST
received a mixed response from stakeholders initially and have brought both positive and
negative changes in the performance of all the sectors of the economy. The model result finds
that the government spending ratio is 1:0.27 which means if the government spends one crore,
the 27 lakh comes from GST tax collection.
Key Words: GST, Economic growth, GDP, Inflation, simple linear regression

I. Introduction
GST is a tax on consumption which is levied on the basis of Principle of destination at the final
consumption point. It avoids the cascading effect or a tax on tax which increases the tax burden
on the end consumer. It is something like a merchant pays to procure goods or services can be set
off later against the tax applicable on supply of goods and services. In other words, GST replaces
multiplicity of taxes imposed by central and state governments, which subsumes all indirect taxes
like Central Excise duty, commercial tax, Octroi tax/charges, VAT (Value added tax) and service
tax. Therefore, manufacturers, wholesalers and retail merchants can avail tax credit mechanism
under GST régime. It is conceptualized as ‗One Nation and One tax‘ and expected to eliminate
the existing cascading tax structure , ease compliances and create uniform tax rates and structure
and may help in reducing additional tax burdens on consumers. As a part of Major taxation
reform post independence and to increase the Tax to GDP ratio the Govt. of India had rolled out
GST from 1st July, 2017, Where in his Budget speech the then Finance Minister said India is a
non-compliant tax society as 36% of employees only fill tax returns in organized sector and 33%
in informal sector and 43% of the registered companies. Indian Tax to GDP ratio is at 16.6%
which is well below the emerging market economies and OECD average about 21% and 34%
respectively.
Under this system of taxation, the end consumer pays the final tax but an efficient input tax credit
system ensures that there is no cascading of taxes- tax on tax paid on inputs that go into
manufacture of goods. In order to avoid the payment of multiple taxes such as excise duty and
service tax at Central level and VAT at the State level, GST would unify these taxes and create a

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uniform market throughout the country. Integration of various taxes into a GST system will bring
about an effective cross-utilization of credits. The data on GST revels that the tax collection has
dropped below ₹1 lakh crore mark to ₹ 91,916 crores for September 2019 which is declined to
2.67% in comparison to the revenue during September 2018(Paisa [Link]).

Presumptions prior to implementation of GST

Dr. R. Vasanthagopal (2011) described GST in India as A Big Leap in the Indirect Taxation
System. Had analysed sector wise impact, expected that the GST could increase the prices of
agricultural produce between 0.61 and 1.18 per cent and this would be a boon to millions of
farmers in India (Thirteenth Finance Commission, 2009). The Manufacturing industry expected
to reduce their cost to the extent of almost 50 per cent. This will help them to compete with their
counterparts in the west. ―Even a two per cent reduction in production cost will increase profits
by over 20 per cent, giving headroom for reducing prices and benefitting end-
users‖(Kelkar,Vijay,2009).It is estimated that the implementation of GST would reduce the
overall prices of all manufacturing sectors between 1.22 and 2.53 per cent (Thirteenth Finance
Commission, 2009). The GST provides for including within its scope the transactions in real
estate. Therefore, for a registered real estate builder, all taxes on inputs (including that on land)
will be off-set against the tax payable on the constructed property. This will reduce cost of
housing to the extent of embedded taxes and hence will benefit the poor.
The gains in real returns to land range between 0.42 and 0.82 per cent. Wage rate gains vary
between 0.68 and 1.33 per cent. The real returns to capital would gain in the range of 0.37 and
0.74 percent, and exports can be expected to register an increase, imports are likely to decrease.
The gains in exports are expected to vary between 3.2 and 6.3 per cent and imports are expected
to gain somewhere between 2.4 and 4.7 per cent.
India‘s Gross Domestic Product (here after referred to as ‗GDP‘) somewhere within a range of
0.9 to 1.7 per cent and the revenue of the Government expected the tendency of tax evasion by
producers and distributors will be low as to the single (or dual) and low rate of tax proposed
under GST. The author concludes that the switchover to a ‗flawless‘ GST would be a big leap in
the indirect taxation system and also give a new impetus to India‘s economic change. It is also
noted that, buoyed by the success of GST, more than 140 countries have introduced GST in some
form to other and is fast becoming the preferred form of indirect tax in the Asia Pacific region.
Syed Mohd Ali Taqvi(2013) ―Challenges and opportunities of GST in India‖, the researcher
explains the GST is only indirect tax that directly affect all sectors and section of our country. It
is aiming at cresting a single unified market that will benefit both corporate and economy. He
also explains the proposed GST model will be implemented parallel by the central and state
government as central GST and state GST respectively.
Nishita Gupta (2014) in her study it stated that implementation of GST in the Indian framework
will lead to commercial benefits which were untouched by the VAT system and would essentially
lead to economic development. Hence, GST may usher in the possibility of a collective gain from

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industry, trade and agriculture and common consumers as well as for the central government and
the state government.
Dr Shakir Shaikh [Link] (2015), in his paper he says GST is a comprehensive tax levy on
manufacture ,sale and consumption of goods and service at national level. The concept of goods
and service tax is one of the biggest tax reforms.
In decades throughout the world, but India has been taking its baby steps to meet its target rolling
out goods and service tax(GST) April 1, [Link] research intends to focus on understanding the
concept of goods and service tax and its impact on Indian economy. Taxation reforms in India the
(GST) is all set to integrate state economics and boost overall growth. GST is expected to create a
business friendly environment as price levels and hence inflation rates would come down
overtime as a uniform tax rate is applied. The study also aims to know the advantages and
challenges of GST in Indian scenario.
Dr Chandu Ravi Kumar,(2015) in his paper makes an attempt to study the concept of goods
and service tax and its impact on Indian economy. The study also aims at knowing the
advantages and disadvantages of GST in Indian scenario. In the competitive world of business,
GST is a significant topic which requires a lot of deliberations from academia and industry. He
has also highlighted the need of GST by saying that recent that by recent application of direct
taxes code (DTC) and goods services tax are considered as path breaking in the economic
restructuring in general and in the taxation area in particular. It is preferred that every economy
must adopt GST or VAT at national level to make their economy for foreign investors. History
has proved that for many countries it has benefited from moving to a GST regime. In India also it
would significantly help for removing economic biases caused by present complex tax structure
and will help progress in national market by, instigating GST the developing economy like India
can accomplish sustainable and balanced development.
Taufik Abd Hakkim, (2016) This paper examines the impact of goods and service tax (GST) on
economic growth in developing and developed countries using the Arellano-Bond dynamic panel
GMM estimation. The empirical results reveal that GST is negatively correlated with economic
growth in developing countries, while statistically significant and positively correlated with
economic growth in developed countries. The conclusion says that the implementations of the
current flat rate of GST is least efficient in collecting the higher revenue and stimulate growth in
developing countries. Hence, the implementation of the current GST should be revised to
generate higher revenue and economic growth without burdening the consumption and real per
capita income in developing countries.
Shefali Dani (2016) analysed the impact of GST implementation in India and reiterates that GST
would be successful only if the country has a strong IT network and conclude that it‘s a half
hearted attempt to rationalize indirect tax structure. The government of India should study the
GST regime set up by various countries and also their fallouts before implementing it. At the
same time, the government should make an attempt to insulate the vast poor population of India
against the likely inflation due to implementation of GST. No doubt, GST will simplify existing
indirect tax system and will help to remove inefficiencies created by the existing current

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heterogeneous taxation system only if there is a clear consensus over issues of threshold limit,
revenue rate, and inclusion of petroleum products, electricity, liquor and real estate.
On the basis of presumptions the following benefits and drawbacks are derived.

Benefits of GST (Goods and Service Tax)

• It would introduce two-tiered One-Country-One-Tax regime.
• It would subsume all indirect taxes at the center and the state level.
• It would not only widen the tax regime by covering goods and services but also make it
transparent.
• It would free the manufacturing sector from cascading effect of taxes, thus by improve the cost-
competitiveness of goods and services.
• It would bring down the prices of goods and services and thus by, increase consumption.
• It would create business-friendly environment, thus by increase tax-GDP ratio.
•It would enhance the ease of doing business in India.

Drawbacks of GST
Wall Street firm Goldman Sachs, in a note ‗India: Questions and Answers on GST — Growth
Impact Could Be Muted‘, has put out estimates that the Modi Government‘s model for the Goods
and Services Tax (GST) will not raise growth, will push up consumer prices inflation and may
not result in increased tax revenue collections. There appears to be certain loopholes in the
proposed GST tax regime which may be detrimental in delivering the desired results.
They are: India has adopted dual GST instead of national GST. It has made the entire structure of
GST fairly complicated in India. The centre will have to coordinate with 29 states and 7 union
territories to implement such tax regime. Such regime is likely to create economic as well as
political issues. The states are likely to lose the say in determining rates once GST is
implemented. The sharing of revenues between the states and the centre is still a matter of
contention with no consensus arrived regarding revenue neutral rate. One of the major drawbacks
of the GST regime could be the direct spike in the service tax rate from 14% to 20-22%.
The Petroleum products have been a major contributor to inflation in India because 80% of
energy needs are met through imports. Inflation in India depends on how the government intends
to include petroleum products under GST in future. Electricity is essential for the growth and
development of India. If electricity is included under standard or luxury goods in future then it
would badly affect the development of India. It is said that GST would impact negatively on the
real estate market. It would add up to 8% to the cost of new homes and reduce demand by about
12%. The study comprise on four parts, first part includes the introduction to the GST and
Economic growth its benefits and drawbacks. Second part of the study consists of a brief note on
Tax collection and economic growth and literature review of the study. Third part of the study
dedicated to methodology and discussion. Fourth part gives a conclusion and suggestions.

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II. Review of Literature

Rishi Gupta (2017) studied the impact of GST in India and concludes that the GST regime will
provide relief to producers and consumers by providing wide and comprehensive coverage of
input tax credit set-off, service tax set off and subsuming the several taxes. Efficient formulation
of GST will lead to resource and revenue gain for both Centre and States majorly through
widening of tax base and improvement in tax compliance. It can be further concluded that GST
have a positive impact on various sectors and industry.
Vasundhara Jain and Reema Aggarwal (2017) analysed the challenges and opportunities of
GST and the study concludes that new policy change of such a huge nature in the tax system will
not be a piece of cake for many but the new unified and transparent system is expected to bring
foreign investment and various other benefits in the future. It will make the Indian market more
competitive than before and will increase the taxpayer base bringing the unorganized sector under
its purview.
Hemlata Tiwari and Shambhu Nath Singh (2018) studied the GST and Economic revival in
India. The study concludes that GST boosts the economy and enhances economic growth. Will
attract foreign companies to start their operation in India. In this way, it will lead to employment
generation and increase in national income. Flow of foreign currency will improve our current
account balance and foreign exchange reserve.
Deepshikha Sikarwar (2019) reiterated that GST will enhance the country‘s gross domestic
product by up to 4.2%, or Rs 6.5 lakh crore and surge in manufacturing output, projected an
increase of 1-2% in GDP after GST is implemented. GST is expected to raise overall Indian
welfare, and is projected to be an inclusive policy in that it would be welfare improving for all
Indian states, would lead to real GDP gains of 4.2%. Growth is driven by an increase in both
domestic and international trade. GST is also expected to increase the international
competitiveness of Indian companies, thus helping the country expand external trade by 32%and
lowers internal trade barriers in this analysis, which improves internal trade by 29%.
Hemlata Tiwari and Shambhu Nath Singh (2019) explored the impact of GST on different
sectors of Indian economy and find out relation between GST and economic revival. The ‗one
nation one tax‘ concept will remove the price disparity of products in different parts of our
country. This will also attract foreign companies to start their operation in India. In this way, it
will lead to employment generation and increase in national income. Flow of foreign currency
will improve our current account balance and foreign exchange reserve. GST will not only give
impetus to major sector of economy, but it will also give a boost to our equity market. In this
way, it will improve our economic growth and make our economy competitive in the globalized
world. Some problems are there in initial stage because companies need to change their existing
tax system. They need to adopt with new framework of tax and manage their working capital
requirement, but once it is implemented it will be beneficial to all. Now people will get cheaper
goods as anti-profiteering clause is there in GST. In this, it is compulsory to pass profit to final

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consumer. There is a hope to slowdown in economic growth in short run, but it will give a boost
to our economy in long run.
On the basis of above literature it is assumed that the spending of the government will stimulate
economic growth. The study finds the link between spending of the government and GST Tax
collection and its percentage in total tax collection. As per the reports the ration of GDP to direct
tax ratio is 5.98 in 2017-18 and indirect tax is 5.43.

III. Data and Methodology

The data is collected from [Link] and mospi sites on Government expenditure and GST
collection for the financial years 2017-19. Simple linear regression is carried out to know the
exact relationship between the two chosen variables. The direct tax in the country constitutes
51.09% of the total tax revenue the remaining comes from indirect taxation and other sources.
The study aims at showing the relationship between GST tax collection and Government
expenditure which shows the spending of the government for stimulating growth.
Diagram-1

The above diagram shows the relationship between GST tax collection and Total tax collection to
the total government expenditure for the financial years 2017-19. The regression equation shows
the relationship between the GST tax collection and Government Expenditure.
GSTt =β0 + β1 GEt + U…..1
Whereas GSTt is total GST collections and GEt is Government expenditure for the study period.

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Purakala ISSN: 0971-2143
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Empirical findings

Table No.1
2
S. Dependent Independent R β0 β1 Signific F T
N variable variable Const Value ance
o ant
I GST Government 0.42 41272.2 0.272 0.000 12.247 3.49
Expenditure

The estimated model equation shows the government spending ratio is 1:0.27 which means if the
government spends one crore, the 27 lakh comes from GST tax collection.

IV. Conclusion
The study is carried out to find the relationship between GST and Economic growth in the
country and it is assumed that the spending by the government will stimulate economic growth.
As per the conventional economic theory the autonomous expenditure by the government will
initiate private spending and create consumption demand which will simultaneously drive the
economy towards economic growth. The study found the relationship between overall
government expenditure and the ratio of GST in total spending it is found to be 1:0.27.

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