© October 2017| IJIRT | Volume 4 Issue 5 | ISSN: 2349-6002

Impact of GST on GDP of Indian Economy—A Study

Dr.N.L.Vijaya
Assistant Professor, Department of Commerce, Government College for Women, Kolar – 563101,
Karnataka

Abstract: A Tax is a mandatory financial charge or some Key Words: Tax, GST, GDP, Indirect Tax, cascading
other type of levy imposed upon a tax payer by the effect
governmental organization in order to fund various INTRODUCTION
public expenditures. Governments use different kinds of
taxes and vary tax rates. They do this in order to Goods and Services Tax (GST) is a system of indirect
distribute the tax burden among individuals or class of taxation in India merging most of the existing taxes
people. To create a tax system, a state must make choice into single system of taxation. GST would be
regarding the distribution of tax burden. GST is levied comprehensive indirect tax on manufacture, sales,
on all transactions such as sale, transfer, purchase, consumption of goods and services throughout India,
barter, lease, import of goods and services. It is a
to replace taxes levied by the central and state
consumption-based tax, taxes are paid to the state which
governments.
the goods or services are consumed not the state in which
it is produced. The main intention is to avoid the double The GST is consumption based tax levied on the
taxation system and to eliminate cascading effect of tax supply of goods and services based on the input tax
in our country. credit method. This method allows GST-registered
Since GST is a transformational tax reform in our business to claim tax credit to the value of GST they
country since independence, it has a huge impact on GDP paid on purchase of goods or services as part of their
of our economy. This paper tries to study such invariable normal commercial activity. Taxable goods and
effect of GST on GDP and its consequences on the overall services are not distinguished from one another and
business activities. GST can be termed as “one Tax, one
are taxed at a single rate in a supply chain till the goods
Nation and one Market”. GST is highly compliance
or services reach the consumer. GST can be termed as
driven law.
“One Tax, One Nation, One Market”.
Table showing how GST works
Stage of supply Purchase Value Value at which supply of Rate GST on Input Net GST=GST on
chain value of addition goods and services made of Output tax output-input credit
input to next stage GST credit tax
Manufacturer 100 30 130 10% 13 10 13-10=3
Whole seller 130 20 150 10% 15 13 15-13=2
Retailer 150 10 160 10% 16 15 16-15=1

OBJECTIVES OF GST • To reduce unhealthy competition among the states

due to tax and revenues
• To eliminate cascading effect of tax • To reduce the tax slab rates to avoid the further
• To improve competitiveness of original goods and clarification issues
services thereby improving GDP of the country
• To ensure the availability of input credit across Need for Goods and Services Tax:
the value chain • Simpler tax structure
• To reduce the complication in tax administration • Eliminates cascading effects of the tax
and compliance • Increased revenue
• To have unified law involving all the tax bases, • Technology driven system
laws and administration procedures across the
countries

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 © October 2017| IJIRT | Volume 4 Issue 5 | ISSN: 2349-6002

Gross Domestic Product (GDP) Domestic Product has the tendency to loom on the
The gross domestic product (GDP) is one of the shoulders of revenue generated by the economy in a
primary indicators used to gauge the health of a year. Still, a worthwhile point includes that the GST
country's economy. It represents the total dollar value has the capability to extend the GDP by a total of 2
of all goods and services produced over a specific time percent in order to complete the ultimate goal of
period; you can think of it as the size of the economy. increasing the per-capita income of every individual.
Usually, GDP is expressed as a comparison to the Also, the GST scheme will certainly improve the
previous quarter or year. For example, if the year-to- indirect revenues to the government as the tax
year GDP is up 3%, this is thought to mean that the compliance will be further enhanced and rigid,
economy has grown by 3% over the last year. The extending the tax paying base which will add to the
United States has a GDP of $18,869.4 billion as of the revenue. The increased income of the government will
fourth quarter of 2016, according to the Bureau of redirected towards the developmental projects and
Economic Analysis. urban financing creating an overall implied scenario.

GST Positive Impact of GDP GST Negative Impact on GDP

There will be one tax rate for all which will create a As the GST rates are 5%, 12%, 18% and 28% and if
unified market in terms of tax implementation and the the GST rate on service will be finalized at 5% or 12%
transaction of goods and services will be seamless then cost of services will get reduced while in else case
across the states. if the rate will be 18% or 28% on services then services
The same will reduce the cost of transaction. In a will become costlier and it will lead to inflation for a
survey, it was found that 10-11 types of taxes levied short period.
on the road transport businesses. So the GST will be In a report, DBS bank noted that initially GST will
helpful to reduce transportation cost by eliminating lead to rise in inflation rate which will remain for a
other taxes. year but after that GST will affect positively.
After GST implementation the export of goods and GST will applicable in the form of IGST, CGST AND
services will become competitive because of nill effect SGST on the Centre and State Government, but some
of cascading effect of taxes on goods and products. In economists say that there is nothing new in the form
a research done by NCAER it was suggested that GST of GST although these are the new names of Central
would be the key revolution in Indian Economy and it Excise, VAT, CST and Service Tax etc.
could increase the GDP by 0.9 to 1.7 percent. As As every coin has two faces in the same way we tried
speculated earlier, the tax experts can now assume that here to familiarize the things related to GST with both
the growth will be around 1 to 2 percent after the perspective i.e. positively and negatively in this
implementation of the GST. article. Despite having some factor which is being
GST will be more transparent in comparison to the expected to affect the Economy adversely there are so
existing law provision so it will generate more revenue many other things which are expected with a positive
to the Government and will be more effective in impact on GDP.
reducing corruption at the same time.
OBJECTIVE OF THE STUDY
Overall GST will improve the tax Compliances.
In a report issued by the Finance Ministry, it was • To study Goods and Services Tax (GST) and
mentioned that Make In India programme will be more Gross Domestic Product ( GDP)
benefited by the GST structure due to the availability • To analyze the impact of GST on GDP
of input tax credit on capital goods.
As the GST will subsume all other taxes, the SCOPE OF THE STUDY
exemption available for manufacturers in regards of
The study is confined to analyze the impact of GST on
excise duty will be taken off which will be an addition
Indian GDP and it does not cover any other area.
to Government revenue and it could result in an
increase in GDP. METHODOLOGY
The GST regime has although a very powerful impact
on many things including the GDP also. The Gross

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The study is based on secondary data. GDP of the Trade, hotels, transport and communication;
previous year’s last quarter and current year’s first financing, insurance, real estate and business services
quarter has been analyzed for comparison. and community, social and personal services account
Analysis and Interpretation for more than 60 percent of GDP. Agriculture, forestry
In India, the growth rate in GDP measures the change and fishing constitute around 12 percent of the output,
in the seasonally adjusted value of the goods and but employs more than 50 percent of the labor force.
services produced by the Indian economy during the Manufacturing accounts for 15 percent of GDP,
quarter. India is the world’s tenth largest economy and construction for another 8 percent and mining,
the second most populous. The most important and the quarrying, electricity, gas and water supply for the
fastest growing sector of Indian economy are services. remaining 5 percent.

India GDP growth rate slumps to 5.7 percent in the manufacturing and agriculture eased. Figures for the
second quarter of 2017, below 6.1 percent in the second quarter of 2017 mark the third consecutive
previous period and market expectations of 6.6 period of slowing growth, following the
percent. It remains the weakest growth rate since the demonetization program started in November of 2016
first quarter of 2014 due to a slowdown in consumer that removed 86 percent of India's currency in
spending and exports. On the production side, circulation.

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1. India GDP growth rate slowed to 5.7% in Q1 of • Soon after demonetization, implementation of
2017-18 on the back of destocking ahead of GST GST has further affected drastically on GDP
implementation and the lingering impact of • Decrease in the cash production and non
demonetization. availability of cash for certain period has reduced
2. Note ban curtailed cash availability, slowing GDP rate
consumption and hurting cash sensitive sectors • The effect of GDP on Production sector is one of
like construction, trade, logistics, and small and the main reason for considerable downfall of GDP
medium size enterprise. rate
3. Private consumption slowed from the March • The confusion prevailing in the general public has
quarter, investment demand turned positive in the affected the growth rate
June quarter after contracting in the previous • This present effect is for short term and is
quarter. expected to improve in the future and will result
4. Uncertainty related to the GST rollout on 1 July, in the increase of GDP rates.
which came about eight months after the
government cancelled 86% of the currency, saw REFERENCE
manufacturers cutting production and dealers
offering discounts on items such as cars. As a [1] Goods and Services Tax – B.Mariyappa,
result, manufacturing growth slowed in the June Himalaya Publishing house
quarter. [2] GST impact on GDP of India-C.S.Vijay Jha
5. Trade, hotels, and transportation, impacted by [3] www.rbi.org.in
demonetization in the March quarter rebounded to [4] www.investopedia.com
grow, mostly due to discount sales ahead of GST
implementation.
6. The central bank’s annual report reiterated its
forecast for gross value added (GVA) to grow at
7.3% in 2017-18, as against 6.3% in 2016-17.
GVA, which is arrived at deducting net indirect
tax from GDP, grew 5.6% in the June quarter, the
same as in the March quarter.
7. The report flagged risks such as an over-leveraged
corporate sector and a stressed banking sector,
because they could delay private investment
demand revival. It also noted that farm loan
waivers could add to upward pressures on
inflation.
8. Two recent policy measures --demonetization in
November 2016 and GST rollout in July 2017 had
a short term impact on economic activity and
aggravated the already slowing momentum.
9. The second half of this financial year is expected
to witness an improvement in trend growth as
impact of demonetization is gradually fading,
with the fallout from GST likely to extend to the
September quarter before fading out

CONCLUSION

• GDP rate has considerably decreased after

demonetization

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