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| Review Paper on Impact of Gst on Functioning of Indian Economy | |||||||
| Paper Id :
17189 Submission Date :
2023-02-12 Acceptance Date :
2023-02-22 Publication Date :
2023-02-25
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| Abstract |
The implementation of GST is crucial if India is to become a global economic powerhouse. Many people worry that the proposed GST regime will stunt the development of the Indian economy. Destination-based taxes are notoriously complex and costly to implement in the Indian economy due to the need for careful record-keeping and careful management. Direct and indirect taxation both serve crucial roles in fostering economic growth and ensuring that resources are distributed fairly. With the implementation of GST, India's cascading system of indirect taxes would be resolved. All of the cascading impacts of CENVAT and Services Tax will be completely abolished with a continuous chain set off from the producer's point to the retailer's point. Additional important Central and State taxes will be absorbed by GST as well. All this points to the fact that the introduction of GST is crucial to the development of the Indian economy. However, the link between taxation and expansion in India is still poorly understood. Most of what we know about India comes from comparative studies that include the country as part of their sample. Thus, the present study finds out the impact of GST on functioning of Indian Economy and implications of GST on select sectors of Indian Economy.
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| Keywords | Indian economy, GST, Tax etc. | ||||||
| Introduction |
What factors cause development in the economy? This is a very popular research issue, and many experts have spent time trying to find an answer to it. The ideas of various models of economic growth, from the classical theory to the most modern endogenous growth models, are all supported by evidence. Exogenous growth models (Solow, 1956, and Swan, 1956) place a premium on physical capital, while endogenous growth models place equal value on human capital and physical capital (Romer, 1986; Lucas, 1988; Barro, 1990; King and Rebello, 1990; Jones et al., 1993). Now that endogenous growth models exist, economic policy is seen as a major element in how well an economy grows. But throughout a wide range of public policy, the role of taxation in growth is still extremely contentious.
Public expenditure has historically been used to accomplish fundamental facets of state function including welfare initiatives, redistributive policy, etc., with the condition that the economy has access to stable financing. State budget needs are mostly met by tax and non-tax sources. Taxes, being mandated and perennial contributors to the treasury, will forever be an indispensable component of the lives of all residents. Empirical studies devote a lot of time and energy to investigating issues related to tax structure, tax policy, and tax relief because these are the top priorities of policymakers. Countries have widely divergent tax regimes due to differences in national structure and long-term goals. In addition to generating income, the tax seeks to redistribute wealth, mobilise resources, and lessen poverty. The balance between work and play, investment choices, and labour supply are all influenced by tax policy (Johansson et al. 2008). Tax rates are only one of the equation; the authority also has a say in how those rates are structured. That's why it's so important for policymakers to investigate how and what kind of organisational framework promotes long-term growth. While increasing GDP per capita is a primary goal of tax policy, it is not clear how tax policy impacts growth or if its effects are permanent in the empirical research.
There is a common misconception that higher tax rates are good for economic growth because they reduce slack in the market. Increasing tax revenue has a multiplicative effect on the economy, decreasing personal and corporate income, decreasing trade, and increasing inflation. It is extremely controversial, and therefore requires serious scholarly examination, to determine the influence of various tax mechanisms on the economy. Extensive empirical research, supported by works such as Macek (2014) and Vartia (2008), shows that excessively high company and individual income taxes retard economic development. Whence Jorgenson & Yun (1990) discover an inverse correlation between income tax and development. In their analysis, Durusu- Ciftci et al. found that consumption taxes really promote economic expansion (2018). However, in 24 OECD nations, a negative correlation was shown between indirect taxes like GST and payroll taxes and direct taxes like personal income taxes and real estate taxes. Here are just a few instances where varying tax policies led to differing growth outcomes in different nations. Accordingly, the purpose of this research was to attempt to present empirical evidence as to how India's tax system influences growth performance at both the national and sub-national levels.
Since a tax affects growth and the other driver of growth, it is difficult to assess the direct impact of tax policy on growth performance. Taxes have an effect on national saving and investment, two factors crucial to economic growth. The tax structure, rather than the tax rate, is the primary determinant of many macroeconomic indices. Concerns about the economy's potential response to a tax reform's accompanying tax structure changes is a common theme. Instead than focusing on tax rates, this analysis looks at their underlying structure. The revenue-neutral policy adjustments and the clear impact of each tax instrument on growth can be gleaned from an analysis of the tax structure. An individual's tax burden as a percentage of total tax receipts is a useful indicator of a tax system's fairness. Several tax reforms were implemented in India after independence, altering the country's tax system at both the federal and state levels to better achieve economic and political goals.
Tax revenue in India is the money that citizens are obligated to give to the government so that it can fund public services. However, this does not account for mandatory payments like taxes and other forms of social security. Direct and indirect taxes are used to fund government operations. Income tax, death tax, inheritance tax, wealth tax, gift tax, property tax, hotel tax, and other forms of consumption tax are all examples of direct taxes. Taxes on fuel, energy, transportation, products, and passengers are all examples of indirect taxes.
For the Indian government, taxation is the primary means of enforcing fiscal policy and raising necessary funds. A functional tax system is essential to economic development in poor nations. We know that taxation can slow a country's economic growth in several theoretical scenarios. The first is that a higher tax rate can reduce economic efficiency by reducing investment and the stock of capital. Second, the only method to boost labour and capital productivity is through research and development (R&D), which may be stifled by tax policy. Third, taxes can reduce people's incentive to work hard, which in turn reduces their contribution to labour productivity. Because it discourages investment in the more productive high-tax sector, the tax may reduce marginal productivity of capital in the low-tax, low-productivity sector. Some studies have found that taxation really stimulates economic development, lending credence to this theory. That's why taxation is so important since it brings in money for the government and helps the economy expand. Reduced economic growth and wellbeing can result from insufficient tax income. That's why it's crucial to have a tax system that's both optimal and robust if we want to strike a healthy balance between funding priorities and economic expansion. A perfect tax system, however, must constantly strike a balance between maximising government revenue and fostering economic growth. Lower tax rates would result in less money going to the government, while higher tax rates would discourage saving and investment.
For our country, the implementation of GST is the next natural step in the long process of indirect tax reform that has been ongoing since independence. The Goods and Services Tax (GST) will have an effect on every aspect of the economy. The unified and expanded market for goods and services is poised to benefit economies on all levels. This will strengthen India's economy by creating an united market across the entire country. The Goods and Services Tax (GST) is not a new form of taxation but rather a consolidation of all existing taxes levied throughout the manufacturing and retail supply chains. There is now a unified tax system with separate state and federal portions. Effective today, GST will be implemented. One India, one tax, and one market are being created through GST. By eliminating the indirect tax barriers between states and integrating the country through a single tax rate, GST will improve revenue collection and boost the development of the Indian economy. Economists agree that India's groundbreaking step toward an integrated tax structure addresses the problem of a regressive indirect tax slab. If implemented, GST is expected to make all industries more profitable in India, bringing the country's tax system in line with that of more than 140 other countries.
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| Objective of study | GST was implemented in July 2017 to subsume many indirect and directtaxes like service tax, excise, entertainment tax, luxury tax, VAT etc.
1. To study the impact of GST on functioning of Indian Economy.
2. To study the implications of GST on select sectors of Indian Economy”.
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| Review of Literature | "The study by Brys examines how tax systems could be
changed to support economic growth for all a nation's residents. This article
attempts to re-evaluate the policy recommendations made in the OECD's 2008 Tax
and Economic Growth report, which concentrated on the impact of taxes on
economic growth from an efficiency perspective”. The study examines how the
core components of each tax design may be improved to better support inclusive
growth by drawing on recent changes in academic literature and national tax
laws. It also looks at how taxes interact with other factors, both inside and
outside of tax systems, that can affect how efficient and equitable taxation
is. The article emphasizes the significance of taking a comprehensive approach
to the tax and benefit systems to assess the effectiveness and fairness of tax
policy. Friendly domestic tax policies must be established at the same time as
international tax legislation and tools to combat tax evasion and avoidance are
put into place. Additionally, it urges steps to enhance tax administration
effectiveness and nudge unofficial economic operators toward the legal market.
This paper offers the platform for further empirical research to better support
tax planning for inclusive growth (Brys, 2016). The study examines the effects of various tax measures on
Nigeria's GDP growth between 1986 and 2012. The results show that tax reforms
and economic growth have a positive and statistically significant relationship
and that tax reforms stimulate economic growth. Accordingly, we deduce that tax
policies that are generally well-accepted strengthen the government's capacity
to raise money to support socially acceptable activities, which in turn raises
GDP and individual living standards. As a way to encourage long-term economic
growth, it is advised that taxes be in line with macroeconomic goals, that
government tax policies be effective and devoid of corruption, and that
government officials be held accountable and transparent (Abdulrahman,
et. al., 2015). Additionally, Zellner and Ngoie (2015) examined
the effects of taxation on economic development in the US from 1987 to 2008
using the Marshallian macroeconomic model. It has been determined that
corporate taxes hinder economic growth. Seward released an examination of the
effects of taxes on the GDP growth of industrialized nations from 1965 to 1995.
(2008). Taxation has been found to have a detrimental impact on economic
growth. This study aims to investigate the impact of different
tax structures on economic development using regression analysis on the OECD
countries between 2000 and 2011. Taxation can be included in growth models due
to its impact on the distinct growth variables, including capital accumulation
and investment, human capital, and technical advancement. The extended
neoclassical growth model of Mankiw, Romer, and Weil is used in this study to
test the relationship between taxes and economic growth using a panel
regression approach (1992). The conventional tax quota, which has some
drawbacks, or the World Tax Index, which incorporates both hard and soft
information, can be used to get a general understanding of the tax rate. “It is
evident from comparing the two sets of data that corporation taxation, followed
by individual income taxes and social security contributions, has the greatest
negative impact on economic growth”. Tax quota appears to be ineffective in
this situation as a measure of taxation because the negative impact on economic
growth predicted by tax quota for the value-added tax was not verified. The
World Tax Index confirmed the negative link between these two factors, however
it had the lowest precision of all the indices taken into consideration.
Property taxes did not have a statistically meaningful impact (Macek,
2014). In this study, we examine the long-term effects of
changing the personal income tax rate on GDP growth. “The way tax reform is
funded and structured will determine how effective it is at promoting economic
growth. Lower tax rates may spur people to work harder, save more, and invest
more money in the short run, but over the long run, a growing government budget
deficit will discourage national saving and raise interest rates”. Although it
is impossible to estimate, most analysts concur that the overall impact on
growth will be minimal at best. Base-widening measures lessen tax rate
reductions' detrimental effects on budget deficits while simultaneously
reducing their positive effects on investment, savings, and employment. If
resources were transferred among industries to where they would be used most
effectively, the economy as a whole might expand. According to the literature,
not all tax reforms will spur economic growth in the same way. Reforms that
boost incentives, reduce current distorting subsidies, prevent windfall
advantages, and forsake deficit financing are likely to contribute to better
long-term economic growth, but they may also cause trade-offs between equity
and efficiency (Gale and Samwick, 2014). Despite being one of the most popular and pertinent tools
employed by policymakers when evaluating strategies to encourage growth, there
isn't strong data about the impact of tax policy in countries in Latin America.
“The region's most significant taxes on economic growth are evaluated using a
variety of techniques, including individual and corporate income taxes, taxes
on general purchases like value-added and sales taxes, and income from natural
resources. We evaluate the effects of different tax instruments on growth using
vector autoregressive methods for Argentina, Brazil, Mexico, and Chile, panel
data estimation for the remainder of the region, and a worldwide sample of
developing and developed countries”. We demonstrate that personal income tax
has little to no impact on economic growth in Latin America, in large part
because tax revenues are minimal. We discover that countries with a significant
reliance on resource exports typically have higher rates of corporate income
tax evasion, indicating that a stronger focus on collection could be
advantageous for the region's economy as a whole. We also demonstrate that some
countries' growth is slightly hampered by corporate income tax. Chile,
Argentina, and Mexico are particularly affected by this. “We conclude that a
greater reliance on consumption taxes has significant positive effects on
growth in much of Latin America, although we once more discover moderate
negative effects in a few of the chosen countries. On the other hand, it would
seem that revenues from natural resources do not encourage expansion” (Canavire
et. al., 2013). Dackehag and Hansson (2012) examined
the connection between income taxes and economic development in the 25 wealthy
OECD nations using panel data from 1975 to 2010. The results show that taxes on
individuals and firms have a chilling effect on economic growth. Corporate
earnings and economic growth do, however, have a stronger connection. “Szarowska conducted a study on the impact of
tax reform on EU GDP growth (2010)”. The author's study employed annual
panel data with adjustments from 24 EU countries between 1995 and 2008. The
estimations support the study's findings, which suggest that direct taxes have
a statistically significant negative impact on GDP growth. The author points
out that a one percentage point decrease in the direct tax quota can be linked
to a 0.43 percentage point increase in GDP growth rate. Orcan (2009) examined how South Africa's fiscal policy
affects economic growth using vector auto-regression (VAR) modeling. According
to this study, tax revenue supports economic growth. However, it takes time for
a new tax to have an independent impact on economic growth. This article investigates several tax structure ideas to
stimulate economic expansion. Although it provides a more detailed breakdown of
taxes and suggests a "tax and growth" rating of taxes, it confirms
the findings of earlier studies. In particular, taxes on firms, taxes on wages,
and lastly taxes on consumer spending are the most detrimental to economic
growth. Annual assessments on fixed structures tend to be the least important
sort of property tax. “The revenue base should be shifted away from income
taxes and toward less distorting taxes such recurring taxes on immovable
property or consumption to achieve revenue neutrality and growth-oriented tax
reform. This study is unique in that it shows how, in some circumstances,
re-designing taxation within each of the major tax categories could obtain
significant efficiency benefits by using data on industrial sectors and
specific firms. For instance, studies indicate that lower corporation tax rates
for small enterprises do not promote growth and that high top marginal rates of
personal income tax can impede productivity growth by deterring risk-taking and
the establishment of new businesses”. The paper acknowledges that every
practical tax reform must achieve a balance among effectiveness, equity,
simplicity, and revenue collection even if it focuses on taxation and economic
growth (Johansson et. al., 2008). This article examines the relationship between state tax
policy and GDP growth within the framework of an endogenous growth model. A
regression model is used to evaluate the impact of taxes on state GDP from 1964
to 2004. According to the data, GDP growth suffers when marginal tax rates are
raised. This analysis highlights the importance of controlling for
regressivity, convergence, and regional impacts to distinguish the impact of
taxes on economic growth across states (Benjamin W. Poulson and Jeffrey G.
Kaplan (2008). Lee and Gordon (2005) examined whether there
was a relationship between taxation and economic expansion using global data
from 1970 to 1997. The findings showed that a higher statutory corporate tax
rate causes lower future growth rates within countries and is strongly
associated with lower average economic growth rates across cross-sectional
differences. “Tosun and Abizahed (2005) examined tax policy and
economic growth in 21 OECD member nations between 1980 and 1999 using the
random effect model (REM)”. Taxes were found to have a favorable and
statistically significant impact on both individual and corporate income.
Endogenous growth theory can now provide insight into how
taxes impact GDP growth. Explicit modeling of the underlying choices made by
the people who contribute to growth makes it possible to investigate tax
incidence and predict the effects of growth. The goal of this study is to
ascertain whether there is consensus regarding the effect of taxes on economic
growth by examining both theoretical and empirical data. The various ways that
taxation may affect growth are illustrated using theoretical models, some of
which may have considerable ramifications. Even if empirical analyses of the growth
effect run into unresolved challenges, the empirical evidence is quite strong
in favor of the conclusion that the tax effect is quite weak (Myles,
2000). |
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| Conclusion |
Numerous studies have highlighted the importance of tax policy on the economy, specifically their effects on efficiency and equity. A competent tax system should aim to produce tax revenues to fund government expenditure on public services and infrastructure development while also taking into account issues of income distribution.
There has been both praise and condemnation of the planned Goods and Services Tax scheme. The preceding analysis suggests that GST will have considerable effects on the economy as a whole, including the rate of economic expansion, consumer prices, the value of exports, and the federal budget deficit. Changing the proportion of taxes based on income to those based on consumption is a good strategy for a developing open economy with a growing service sector. Simplifying the process with the suggested structure will result in increased fairness across all marketplaces. In order to entice international investors, it is recommended that all economies adopt GST on a national basis. Sustainable and balanced development in a developing economy like India's is made possible by the implementation of GST. India would gradually adopt international norms in taxation, business regulations, and management techniques, positioning itself among the world's elite in these areas. |
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| References | 1. Brys, B. et al. (2016), “Tax Design for Inclusive Economic Growth”, OECD Taxation Working Papers, No. 26, OECD Publishing, Paris. http://dx.doi.org/10.1787/5jlv74ggk0g7-en
2. Canavire-Bacarreza, G., Martinez-Vazquez, J., &Vulovic, V. (2013). Taxation and economic growth in Latin America (No. IDB-WP-431). IDB working paper series.
3. Dackehag M. & Hansson A. 2012, Taxation of Income and Economic Growth: An Empirical Analysis of 25 Rich OECD Countries. Lund University Department of Economics. Working Paper No 6.
4. Durusu-Ciftci, D., Gokmenoglu, K. K., & Yetkiner, H. (2018). The heterogeneous impact of taxation on economic development: New insights from a panel cointegration approach. Economic Systems, 42(3), 503-513.
5. Gale, W. G., &Samwick, A. A. (2014). Effects of income tax changes on economic growth. Economic Studies, https://www. Brookings. edu/wpcontent/uploads/2016/06/09_Effects_Income_Tax_Changes_ Economic_Growth_Gale_Samwick. pdf.
6. Jelilov, G., Abdulrahman, S., &Isik, A. (2015). The impact of tax reforms and economic growth in Nigeria. The Empirical Economics Letters, 15(5), 1100-1115.
7. Johansson, Å., Heady, C., Arnold, J. M., Brys, B., &Vartia, L. (2008). Taxation and economic growth.
8. Johansson, Å., Heady, C., Arnold, J. M., Brys, B., &Vartia, L. (2008). Taxation and economic growth.
9. Jorgenson, D. W., & Yun, K. Y. (1990). Tax reform and US economic growth. Journal of political Economy, 98(5, Part 2), S151-S193.
10. Lee Y. & Gordon R. 2005, Tax structure and economic growth, Journal of Public Economics, 89(1), 1027-1043.
11. Macek, R. (2014). The impact of taxation on economic growth: A case study of OECD countries. Review of economic perspectives, 14(4), 309.
12. Myles, G. D. (2000). Taxation and economic growth. Fiscal Studies, 21(1), 141-168. |
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