INDIA'S Journey to THIRD GDP Nation on VISION : Story Extract - 6 : The Goods and Services Tax (GST) (Implemented 2017)

 The Goods and Services Tax (GST) (Implemented 2017)


The 2017 Goods and Services Tax (GST) was a groundbreaking tax reform that brought together countless fragmented indirect taxes into one comprehensive taxation structure. Its main purpose was to create a national market, make taxation easier, and formalise the economy by encouraging companies to take part in this type of tax. The introduction of GST replaced the old cascading tax structure, which led to reduced inefficiencies and made it easier for manufacturers to conduct business.

Fiscal revenue for the government in FY 2024-25 has shifted to GST, which is now the second-largest contributor, accounting for approximately 30% of total revenue and 2.5% of GDP after income tax. The simplified tax system has helped to formalize the economy by bringing more businesses, including MSMEs, into the formal tax regime. According to reports, a GST rate cut has essentially the same effect on the economy as direct tax reductions, with the potential to stimulate GDP growth by 20-50 basis points if benefits are passed onto consumers.

The government is making arrangements to implement the "next-generation GST reforms" by the end of 2025. "The proposed reforms, which are referred to as "GST 2.0," aim to replace the current four-tier tax system with one of two on top of all goods paid taxes at either 5% or 18%.". It is anticipated that this will bring down the cost of basic goods and stimulate more practical use, particularly for expensive purchases like cars and air conditioners. According to a report by Fitch Solutions company, BMI, these reforms could serve as 'an essential buffer against external shocks' and help maintain India's growth. The evolution of GST from a revenue and formalization tool to an effective fiscal stimulus is evident.

Market formalization is the primary outcome of tax reform. Simplified tax laws lead to a decrease in compliance costs for businesses and encourage them to participate in the formal economy. By expanding the tax base, the government generates more revenue. By promoting consumption, which makes up more than 60% of India's GDP, the proposed "GST 2.0" is a calculated move to leverage this formalization. Thus, the implementation of GST reforms is a potent technique to safeguard the economy against international influences and sustain its growth trajectory.

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