Tax is a huge source of revenue for our state and central governments, but owing to the complex nature of our current tax system, it’s not a surprise that many people do not understand how it works. The Goods and Services Bill has been discussed by different parliamentary committees since 2006. It came into news again when the Lok Sabha finally passed the bill and Finance Minister Arun Jaitley decided to implement the Goods and Services Tax (GST) from the next financial year. As of now, it is being touted as one of the biggest taxation reforms in India.

What is GST?

The Goods and Services Tax is a comprehensive tax system levied on goods and services at a national level.

This system will collect taxes at the consumption-level where the consumers buy the goods and services from a retailer or a service provider, and will replace all different kinds of indirect taxes with the one single tax system. Almost 150 countries have a GST in place, and the World Bank has been urging India to implement it for a long time now.

What will the GST do?

Right now taxes are managed differently by the state and central governments.

There are taxes like central excise duty, service tax & customs duties at the central level, and VAT (value-added tax), entertainment tax, luxury tax or lottery taxes at the state level on the same commodities or services.

This results in cumulative taxes, thus making the goods and services costlier.

With the new change, since GST collects taxes only at the purchase level, it may reduce the overall cost of manufacturing the goods or running the business, and also could facilitate tax compliance. The two ways this could help our economy is that it could reduce corruption than the current tax system sees at different levels, and it could bring more efficiency in running of businesses with no tax burden on the manufacturers and providers of goods and services.

The need for GST!

One of the main reasons for implementing GST is to remove the cascading effect of taxes, which in simple term means “taxes on taxes”. For example, let’s say Mr. X sells goods to Mr. Y after charging sales tax and in return Mr. Y further sells those goods to Mr. Z again after charging sales tax and Mr. Y while calculating his sales tax liability will also include the sales tax paid by him on his previous purchase and that will result in to a tax being paid on taxes again.

So in the above example, if there was a tax paid on Rs. 3 lakhs (sale value) at 15% at the first stage then the total tax liability will come out to be Rs. 45,000/-. And now in the next stage when these goods are further sold say at Rs.4 lakhs then the tax liability will be Rs.60,000/-. But now, there will be a set off of Rs.45,000/- as available which will make the actual tax at the last stage to be just Rs.15,000/-

How will GST affect our economy?

GST may help increase India’s overall GDP (Gross Domestic Product) and increase its total revenue collections.

A simpler tax structure will encourage exports and foreign investments, which will increase employment opportunities (and could help towards the “Make in India” project of the government).

It could help integrate the entire nation under one tax system, thus opening (and simplifying) inter-state business. This will benefit smaller businesses in India.

How will GST affect the common man?

The tax system in India is very complex right now and it makes it difficult for various businesses to comply with a cumulative tax structure. If GST can reduce the operating cost of these businesses, it will lead to lower taxes to be paid by the consumer at the end-level. The benefit to businesses and consumers will eventually increase India’s GDP and overall income, and consumers can expect more indirect benefit after its rollout.

The full impact of the GST can be understood only after it is implemented but it will definitely help reduce corruption at various levels where taxes are collected right now.

The Challenges ahead of GST!

1. It doesn't include certain products like petroleum & alcohol products, which defy the purpose and also results in a heavy loss to the exchequer.

2. We really need a very robust IT - Information Technology (infrastructure) set up at the grass-root levels and this has to be factored well in advance.

3. There is a strong need of making the entire process in terms of bringing standardization in the entire systems, rules, principles & procedures across levels.

4. Need to empower the government machinery before bringing this massive change?

5. Similarly, government need to create ample awareness via different medium to educate the common man, because it has been seen more often, then any changes by the government specially for the common man is not informed to them well in advance. Proper channels to address their concerns should be taken up and they should be taken in to confidence before implementing any major changes affecting them.

6. Similarly, government also needs to educate small entrepreneurs, traders & businessmen.


GST would facilitate seamless movement across nation and will reduce the overall transactional cost of running the business and thereby also reducing the compliance of following multiple tax rules and obligations. This is highly relevant in todays time looking at the growth Indian economy can achieve and to come alongside the other developing nations as it will reduce corruption and bring more efficiency of running the businesses.

GST is clearly a long-term strategy but apart from the challenges as mentioned above, we also have to bear the likely higher inflation rates/administrative & management overheads in the initial stages.


1. The Times of India


More about the author:

Rishabh Parakh is a Chartered Accountant and Founder Director and Chief Gardener of Money Plant Consulting, a tax and investment service provider. He has also written on finance for many leading publications.


Views expressed here are of the author alone and do not necessarily represent that of the brand.

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