7 Ways Goods and Service Tax benefits the Economy

GST is intended to bring a single market in India, with uniform rates and procedures on taxes, and to eliminate economic barriers, thereby opening a path to achieving a domestically integrated economy. In simpler terms, GST works as an alternative for multiple indirect taxes levied by central and state governments, making Indias governments one market. Most countries that implement GST have a unified single GST system, meaning a uniform rate is applied across the nation. Since the GST is a destination-based tax, it is possible for both Centre and states to collect the tax under one joint tax base.

GST is levied on states where goods and services are consumed (not where they are manufactured), making it a destination-based tax. It is a uniform tax levied on goods and services supplied directly from manufacturers to consumers, and it has essentially replaced several indirect taxes. GST has a dual structure, in which both the centre and states are empowered to levie a tax simultaneously on the supply of goods and services.

Compared with the GST Unified Economy, in which taxes are collected by the Federal Government and then distributed among states, under a dual GST structure, a Federal GST is levied on top of a State sales tax. A country with a single GST platform merges the central taxes (e.g., sales taxes, consumption taxes, excise duties, and service taxes) with the state-level taxes (e.g., entertainment taxes, admission taxes, transmission taxes, consumption taxes, and luxury taxes) and collects the central taxes (e.g., the consumption tax) into one uniform tax.

Some goods and services are exempted from the GST, and are instead covered by an existing levy in a particular state, such as a value-added tax (VAT) — a tax paid at each step in a supply chains value-added tax — a tax paid at each step in a chains. The earlier non-GST system implied taxes were paid on value and margins of goods at each step of production.

Tax policies have direct impact on the total economy through shifting the demand for goods and services. Tax policy also impacts the overall economy by influencing government deficits. Governments affect the economy by changing tax rates and types, spending levels and composition, and borrowing levels and forms.

Tax policies can change long-run economic output in sustainable ways, changing incentives to work, save, and invest. Tax policy also changes firms cash flows or incentives to invest, and thus changes demand for investment goods. Non-neutral tax expenditures may suppress growth by shifting investments into areas that are not as productive as they could be, instead of increasing capital investment and growth throughout the economy.

State and local tax cuts and incentives are arguably not the best use of government revenues, even if the goal is to incentivize for-profit firms to employ more people. In particular, there is little evidence that state and local tax cuts–when paid for with cuts to government services–stimulate economic activity or job creation. This claim is made even though state and local governments have to reduce public services in response to the incentives provided and the reductions imposed on taxes. These studies have typically found that raising taxes and using the extra revenue to pay for more public services boosts economic growth.

Raising taxes used to improve public services may be the best way to stimulate an economy. However, evidence suggests that tax increases, used to increase the amount and quality of government services, may promote economic development and job growth. This result supports the conclusion that state and local officials must take public services, along with the effects on the economy of taxes, into consideration in designing tax policies that aim at optimal employment growth.

Economies with simpler, better-designed tax systems are capable of increasing business activity, and eventually, investment and employment.11 New studies suggest that one important factor in business entrance is ease of paying taxes, independent of corporate tax rates. Many countries have reduced double taxation on business income through greater integration of individual and corporate tax codes, reducing distortions, lowering capital costs, and encouraging investment. Eliminating double taxation of corporate income will level the playing field between various forms of enterprise, lower the tax burden of investments, and reduce the distortions that influence corporate funding decisions. Removing Double taxation of corporate income would level the playing field among different forms of businesses, reduce the tax burden on investment, and reduce distortions affecting business financing decisions.7 The typical tax income distributions according to firm size in economies across sub-Saharan Africa, Middle East, and North Africa indicate that micro-, small-, and medium-sized enterprises account for over 90% of tax payers, yet only 25-35% of the tax revenues.8 Imposing higher tax rates on businesses in this range may not raise a lot of government tax revenues, but could lead businesses to shift into the informal sector, or, even worse, to stop operating.

Modest tax rates are particularly important to small and medium-sizeenterprises, which contribute to economic growth and employment but do not add significantly to tax revenue.7 Typical distributions of tax revenue by firm size for economies in Sub-Saharan Africa and the Middle East and North Africa show that micro, small and medium-size enterprises make up more than 90 % of taxpayers but contribute only 25-35 % of tax revenue.8 Imposing high tax costs on businesses of this size might not add much to government tax revenue, but it might cause businesses to move to the informal sector or, even worse, cease operations. Recent data from World Development Indicators and Human Development Indexes suggest the gains are effectively captured and channeled to higher-quality public goods and services (Figure #2). The collection of taxes and fees is the basic way that countries generate government revenues, enabling them to fund investments in human capital, infrastructure, and services to citizens and businesses.

Rather than pushing more fiscal stimulus, or leaving the Fed to manage inflation with higher interest rates, policymakers should focus on increasing the economys productive capacity through tax law reforms to prioritize economic growth and opportunities. In the near term, governments can focus on stabilizing the macroeconomy–for instance, expanding spending or cutting taxes to boost an inefficient economy, or cutting spending or raising taxes to fight rising inflation or to help mitigate foreign vulnerabilities. As for composition, governments face a trade-off when they decide between targeting stimulus at the poor, where the probability is higher that the spending will go all the way through and have a stronger economic impact; funding capital investments, which can generate jobs and help boost longer-term growth; or providing tax cuts, which can spur firms to hire more workers or purchase new capital equipment.

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