• Notification Date: 26-02-2024
• Notification No: N/A

GST: Another Step Towards Formalization of Economy

“Ek Bharat Sreshtha Bharat. GST stands for Good and Simple Tax. It is a path breaking legislation for New India. It’s a revolutionary taxation system for the digital India. GST is not just a tax reform, but it is a landmark step towards economic and social reforms” said Prime Minister Narendra Modi on rollout of Goods and Services Tax. 

Before July 1, 2017, the Indian indirect tax system was significantly fragmented, with both the Central and State governments independently imposing taxes on goods and services. Various taxes, such as excise duty, service tax, VAT, CST, purchase tax, entertainment tax, and octroi, contributed to this complexity. Additionally, there was a multitude of rates, laws, and procedures, leading to a substantial compliance burden. 

Another challenge was the imposition of tax on tax, where VAT was applied to a value that already included excise duty, creating a cascading effect. This practice disrupted the input tax credit chain as goods moved across state borders, resulting in hidden costs for businesses. Moreover, pre-GST, tax checkpoints at inter-state borders created bottlenecks in the transportation of goods, leading to inefficiencies in the logistics sector and negatively affecting businesses. 

Each state functioned as a distinct market for both industries and consumers, influencing the location decisions for factories and warehouses based more on the prevailing tax regime than on pure business considerations. This situation rendered the industry less competitive overall. 

Hence, a significant milestone occurred on July 1, 2017, as the Goods and Services Tax (GST), the most substantial tax overhaul, was launched within the confines of the Central Hall of Parliament. The implementation of GST eliminated the inefficiencies and complexities inherent in the outdated taxation system, contributing to an acceleration of economic growth. 

GST has widened the tax base in India, increased tax-registered businesses, and brought certain unorganized sectors under the tax net. GST has also contributed to the overall ease of doing business in India and simplified taxpayer compliance to a massive extent. The transparent nature of the tax system, with the digitization of processes and electronic records, helps in curbing tax evasion and increasing transparency. Additionally, GST has made business processes more efficient than ever by simplifying the tax structure. 

In January 2024, India's Goods and Services Tax (GST) collection experienced a notable increase of 10.4%, reaching Rs 1.72 lakh crore, marking the second-highest monthly receipts since the inception of the GST regime. The highest-ever monthly GST collection was recorded in April 2023 at Rs 1.87 lakh crore. 

The gross GST revenue for January 2024 was Rs 1,72,129 crore, reflecting a 10.4% year-on-year (YoY) growth compared to the Rs 155,922 crore collected in January 2023. This achievement stands as the second-highest monthly collection, marking the third month in the financial year 2023-24 with collections exceeding Rs 1.7 lakh crore. 

The Goods and Services Tax (GST) collections for micro enterprises in the financial years FY20 and FY21 amounted to Rs 2.2 lakh crore and Rs 2 lakh crore, respectively. However, in FY22, the collection increased to Rs 2.3 lakh crore, surpassing pre-pandemic levels. In the case of small enterprises, GST payments remained steady at Rs 0.9 lakh crore in both FY20 and FY21 but saw growth to Rs 1 lakh crore in FY22. Similarly, for medium enterprises, GST payments declined from Rs 1.9 lakh crore in FY20 to Rs 1.8 lakh crore in FY21 but rebounded to Rs 2 lakh crore in FY22. 

The Goods and Services Tax (GST), implemented in India in July 2017 as a major overhaul to streamline and unify the nation's tax system, has left a substantial imprint on the Indian economy. According to a survey by Deloitte conducted in June 2023, 88% of Micro, Small, and Medium Enterprises (MSMEs) have reported a decrease in goods and services costs, coupled with streamlined supply chains. 

The survey, which gathered 612 responses from both large enterprises and MSMEs across six industries, aimed to capture India Inc's perspectives on GST integration, ease of doing business, tax technology, investment-centric growth, taxpayer profiling, and recommendations. MSMEs credited the reduction in goods and services costs to the enhanced uniformity within the GST regime. 

Several measures introduced under GST have proven beneficial for MSMEs, as reported by the survey respondents. Seventy-four percent acknowledged the positive impact of increasing the threshold limit for GST registration from Rs 20 lakh to Rs 40 lakh. Similarly, 73% highlighted the advantages of relaxed thresholds and reduced restrictions for availing the composition scheme. Fifty-five percent found invoice financing solutions, based on GST-reported invoices, to be beneficial, while 46% appreciated the offline option for raising e-invoices without incurring any technology costs. 

GST has opened up new avenues through quick bill discounting and loans to MSMEs. The Trade Receivables e-Discounting System (TReDS) has been implemented. This has enabled entrepreneurs to access credit based on upcoming receivables 

Enabled by the Goods and Services Tax Network, the ushering of this uniform tax has been critical for informal businesses which earlier could not access formal credit and other financial services. As India marches on to become a ten trillion-dollar economy, it would have been important to factor in the development of over sixty million MSMEs in the country. With GST, not only staying outside the formal purview becomes counter-productive for small businesses, but also incentives them with ease of credit, as witnessed during the pandemic through the Emergency Credit Guarantee Line Scheme. 

Goods and Service Tax has been a game changer when it comes to Centre and State relations. The One Nation One Tax reforms have indeed been a turning point of Indian Economy and its journey towards formalization.