The launch of the Goods and Services Tax (GST) Act by the government in July 2017 is an important moment to remember for all of us. Through implementing the 101st Constitutional Amendment, the GST Act was created, which has led to ‘One Tax’ for ‘One Nation.’
As we continue on with the new system, GST has proved efficient to improve the tax structure of India. To some extent, GST has played a significant role in helping citizens not only follow but also understand the rules and regulations of taxation.
GST can also contribute to the Indian economy by saving it from the downfall of a deficit. To understand how GST can manage to get the Indian economy back on track, let us first understand the basics of GST.
What Is GST?
GST has subsumed almost all the indirect taxes of the country. GST is a destination-based tax. Unlike the pre-GST era, it will not collect tax at every stage of production of goods and services, but the consumption end of the products and services.
To understand what is gst in india, you need to understand the tax rates under GST. The Act divides GST into five tax slabs for collection of indirect tax, i.e. 0%, 5%, 12%, 18% and 28%.
The most basic commodities attract lower tax rates, while the luxury goods and services attract higher tax rates in GDP. This mechanism allows the removal of the tax burden on essential items for consumers and increases the tax collection from the non-essential goods and services.
Fiscal Deficit Of India
The fiscal deficit is the shortfall in the government’s total income from receipts compared to the expenditure over a fiscal period. If this difference in income and expenditure becomes wider, the budgetary deficit increases to a high per cent of the GDP. The fiscal deficit of India lies around 3% of the GDP of India.
To meet these finances, the government has to borrow from the domestic and foreign market to fulfil its expenditure requirements. But acquiring a sizable amount from the local market can affect Indian businesses because of credit deficiency.
How Does GST Lower The Rate Of Deficit?
The deficit will increase when the government spends more money than it earns in taxes and other revenues. The most direct solution to prevent a potential economic crisis and reduce the fiscal deficit is increasing the tax collection.
The total tax collection of the indirect taxes under GST is higher compared to direct tax collection regarding GDP. The larger amount of indirect tax acquired through GST will help to meet the shortfall of indirect taxes for the total revenue income for the fiscal year.
Thus, GST helps to increase the total revenue of the economy by increasing indirect tax. There’s some truth in this statement – the GST collection touched the 3rd highest mark amounting to Rs 1.07 lakh crore in March 2019, as per data released by the Government of India (GoI).
If the government is able to increase the taxpayers base in India, the tax collection from indirect tax can be increased considerably.
How Will GST Increase Tax Collection?
- GST has brought the transparent digital process resulting in reduced tax evasion.
- Incentives of Input Credit Returns have stimulated Indians to opt for GST.
- Easy compliance and relief for small businesses act as a boon for indirect taxes.
- A hassle-free online registration and payment process ensures smoother tax collection.
- Uniform rules and regulations under a single tax have streamlined the tax filing procedure.
- The GST returns procedure has simplified after the consolidation of all periodic returns into one.
Even though the tax rates have reduced under GST, with all the above measures, the government can increase the taxpayers base and improve GST collection.
Higher taxes collection will ultimately increase the revenue of the Indian economy. This increased revenue Income will reduce the fiscal deficit to the desired bracket.
The government of India (GoI) is following various policies to reduce fiscal deficits of India. The gst act can play a significant role in reducing the fiscal deficit to a lower rate.
For a developing country like India, deficit financing is necessary for growth. A decline in the rate of deficit will speed up the Indian economy by maintaining the balance between Inflation and growth.