What are The Main Objectives of GST and Its Impact?

The main objective of GST is to bring the entire country under a single tax regime. It aims to eliminate multiple layers of taxation which it has successfully done over the period of years. There are several other objectives for which the government replaced existing indirect taxes with GST. Here, we will be discussing primarily those objectives.

Table of Contents

• What is Goods and services tax (GST)?
• Objectives of GST
  • Building a Common Market with Uniform Taxation
  • Eliminating the Cascading Effect of Taxes
  • Simplifying the Taxation System
  • Combining Many Indirect Taxes into One
  • Widening the Tax Base
  • Reducing Tax Evasion
• Limitations of GST

What is Goods and services tax (GST)?

GST full form is Goods and services tax. It is a type of indirect tax that the government adds to the price of most goods and services. When you buy something, the price you pay includes this tax. The company selling the item collects the tax from you and then sends it to the government. In some places, it is known as Value-Added Tax (VAT).

Due to GST, the same tax rate is applied to all goods and services, no matter where you are in the country. A unified GST system combines various taxes from the central government and state-level taxes into one single tax. This system makes almost everything taxed at the same rate.

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Objectives of GST

The following points explain the objectives of GST:

1. Building a Common Market with Uniform Taxation

The Goods and Services Tax unifies India's market under a single tax regime. Doing so eliminates the complex web of state and central taxes that vary from one state to another. This law brought uniformity in taxation which simplified the tax structure and also ensured that goods and services flow seamlessly across state borders without additional tax burdens.

By doing so, GST fosters a more integrated and inclusive economic environment, encouraging fair competition and making it easier for businesses, especially startups and small enterprises, to expand their operations nationwide without worrying about varying tax regulations.

Impact: This objective has significantly reduced the logistical and compliance complexities previously faced by businesses operating across state lines. GST has helped in reducing the cost of goods and services. Overall, the efficiency of supply chains has increased. This has not only benefited businesses by lowering transaction costs but also enhanced consumer access to several products at lower prices by stimulating demand and economic growth.

2. Eliminating the Cascading Effect of Taxes

Before GST, businesses often faced the issue of 'tax on tax,' where the final consumer bore the burden of multiple layers of taxation are included in the cost of goods and services. GST addresses this by implementing a comprehensive input tax credit system, allowing businesses to claim credits for taxes paid on input services. This mechanism significantly reduces the cascading effect, ensuring that tax is levied only on the value addition at each stage of the supply chain, leading to lower costs for consumers and a more transparent taxation process.

Impact: The elimination of the cascading tax effect has led to a more transparent and equitable pricing mechanism, where the final price paid by the consumer is reflective of the actual value addition. Goods and services have become cheaper for consumers due to GST. It has also enhanced the competitiveness of Indian products within international markets. Apart from that it has also contributed to a more efficient allocation of resources - within the economy. For businesses, it has meant improved profit margins and reduced tax liabilities. This creates a positive environment for growth and expansion.

3. Simplifying the Taxation System

GST simplifies the taxation system by collectively bringing multiple indirect taxes into a single tax. This simplification reduces the administrative burden on businesses and the government, making tax compliance easier and more efficient. The GST regime is supported by a digital-first approach, with all processes, including registration, tax filing, and refunds, being managed online through the GST portal. This digital infrastructure not only makes compliance straightforward but also minimizes human errors and enhances the speed of processing tax-related matters.

Impact: The simplification of the tax system under GST has had a profound impact on the ease of doing business in India. The digitization of tax processes has reduced paperwork, minimized human error, and made tax compliance more straightforward and less time-consuming. This has been particularly beneficial for SMEs, which often lack the resources to navigate complex tax regulations. Moreover, a simpler tax system has improved tax compliance rates, leading to increased revenue collection for the government.

4. Combining Many Indirect Taxes into One

One of the transformative aspects of GST is its ability to absorb most of the existing indirect taxes that were previously levied by state and central governments, such as excise duty, service tax, VAT, and others. This consolidation has significantly reduced the multiplicity of taxes, compliance obligations, and the likelihood of double taxation, thereby simplifying the tax landscape for businesses. It has also streamlined the government's tax administration process, making it more effective in tax collection and enforcement.

Impact: By consolidating various indirect taxes into a single tax, GST has significantly reduced the multiplicity of taxes that businesses had to deal with. This has not only simplified tax administration but also minimized disputes related to tax jurisdiction and interpretation. The result has been a more stable and predictable tax environment, encouraging investment, both domestic and foreign, in various sectors of the economy. For the government, it has meant a reduction in the cost of tax collection and an increase in operational efficiency.

5. Widening the Tax Base

By setting a lower threshold for GST registration compared to previous indirect tax regimes, GST has brought a larger number of businesses into the tax net. This expansion of the tax base is not only about increasing tax revenues but also about creating a more equitable tax system where the tax burden is shared more broadly. A wider tax base contributes to the formalization of the economy, as more businesses become compliant with tax regulations. This formalization is beneficial for businesses as it enhances their access to credit and other financial services, while also increasing the government's revenue that can be used for public welfare and infrastructure development.

Impact: The expansion of the tax base under GST has brought a large number of informal businesses into the formal sector. This formalization has several positive implications, including better access to finance, greater consumer trust, and increased eligibility for government schemes and benefits for these businesses. For the economy, a wider tax base means a more substantial and sustainable source of revenue for the government, which can be used to fund public goods and services, thereby contributing to social and economic development.

6. Reducing Tax Evasion

GST creates a more transparent and straightforward tax system. With GST, every transaction and sale is recorded through a unified system, making it harder for businesses to hide or manipulate their sales figures to avoid taxes. This system requires businesses to report their sales and purchases accurately to claim tax credits, which encourages them to maintain honest records. As a result, it becomes easier for the government to track transactions and ensure that the correct amount of tax is collected, thereby reducing tax evasion.

Impact: The impact of reducing tax evasion through GST is significant. Firstly, it leads to more fairness. When everyone pays their fair share of taxes, it reduces the burden on honest taxpayers. Secondly, it increases government revenue without raising tax rates. This extra money can be used for public services like education, healthcare, and infrastructure. Finally, reducing tax evasion helps create a level playing field for all businesses. When everyone pays their taxes, it's harder for dishonest businesses to undercut competitors by avoiding tax. This encourages healthy competition and can lead to better prices and services for consumers.

Limitations of GST

The following are the limitations of GST:

• Complicated for Small Businesses: Small businesses find GST complicated, especially if they're not used to doing things online. Keeping up with GST rules takes a lot of effort.
• Costs More for Some Services: Services like eating out or getting a haircut might cost more because the tax rate for services has gone up, making things more expensive for customers.
• Tech Problems: GST needs good internet and computer skills. Businesses in places with poor internet connectivity or those not good with technology struggle to follow GST rules.
• Starting Troubles: When GST first started, it was confusing. There were problems with understanding the new rules and using the GST software, which made things hard for businesses.
• A Lot of Paperwork: Even though GST was supposed to make taxes easier, there's still a lot of paperwork and online filing that needs to be done regularly, which can be a lot for small businesses.
• Cash Flow Issues: Businesses have to pay GST when they bill their customers, not when they actually get paid. This can be tough for businesses that usually get paid later.
• Not All Goods Are Cheaper: While some basic things like food are taxed less or not at all, other items might be taxed more, making them more expensive.
• Problems with Services Across States: Moving goods across states is easier, but there are still issues related to providing services in different states, which can be confusing.