How GST Has Helped to Reduce Price

The GST, implemented in India since July 1, 2017, was one of the biggest tax reforms in India. Among the top objectives of the GST was the simplification of the tax regime, easing the cascading effect of taxes that had long pushed up the prices of goods and services. By merging multiple central and state taxes into a single tax, GST has helped bring down the prices of many goods and services. This article explores the mechanisms through which GST has contributed to price reduction and its overall impact on the economy, simply the positive impact of GST for Businesses.

1. Elimination of Cascading Tax Effects

Before GST, India’s tax system was riddled with multiple taxes at different stages of the supply chain. The central excise duty, service tax, VAT, central sales tax (CST), and the myriad cesses and surcharges were included in it. The cascading effect was probably one of the most potent drawbacks of this atomistic tax structure-cum-system; tax upon tax implied collections at various levels tended to increase the effective price of goods and services. For example, excise duty would be levied on raw materials, with the VAT on the finished product, thereby stacking taxes on each other.

GST, on the other hand, sought to avoid such a cascading effect by allowing input tax credits for taxes paid on inputs at every stage of production and distribution. This mechanism reduces the tax burden on goods at each stage and decreases the final price of products.

2. Uniform Tax Rates Throughout the Country

Before GST, different states had variegated tax rates, exemptions, and classifications of goods and services under the Value Added Tax (VAT) system. It meant that the product sold in one state could be priced differently than the same product sold in another state because of the differences between local tax policies. Regional disparity created inefficiencies in the supply chain because businesses had to adjust their prices and packaging depending on the local tax structure. In addition, businesses that operate in more than one state have to contend with the administration of multiple tax laws which lead to higher administrative costs.

GST replaced this piecemeal system with a uniform tax structure that spans the whole country. A uniform tax rate on commodities and services-that is, apart from a few categories-except for a category means businesses can sell their products at one price across the entire country. This has resulted in reduced logistics and administrative costs, as businesses no longer have to account for variations in state-specific taxes.

3. Fall in Prices of Goods Due to Reduced Compliance Costs

Earlier, the multiple taxes imposed by the central and state governments had resulted in high compliance costs for businesses. Every tax demanded different registrations, returns, and documentation, thus creating an environment of administrative complexity and inefficiency. Businesses had to hire dedicated staff or external consultants that would handle the tax filing, audit, and all compliance-related work which, therefore, increased their operational costs. This further increased the prices for consumers because businesses passed on the cost.

Under GST, businesses now interact with just one tax authority and one coherent system of filing taxes. The incorporation of technology-rich return filing and payment processing platforms has reduced paperwork and complicated tax compliance in significant ways.

4. Input Tax Credit and Reduced Production Costs

The other most important aspect of GST is the input tax credit system. Under this, business houses get credit for the GST paid on inputs like raw materials, components, and services consumed in the generation of goods and services. This offsets the incidence of taxes paid on purchases against their output tax liability thereby reducing the overall cost of production.

In the pre-GST regime, tax paid on inputs was never recovered by businesses, especially those dealing in both goods and services. Illustrations of situations include the service tax paid on modes of transportation or warehousing for manufacturers; such a cost would never be allowed for credit. Under GST, input tax credit is available at each stage in the supply chain so that businesses do not face all the tax burden on their inputs, thus reducing the cost of production. The savings are then passed on to the consumer in the form of reduced prices.

5. GST and Price Reduction in Specific Sectors

Although the overall influence of GST on prices has been positive, it has especially been striking in some sectors. Goods and services within industries such as manufacturing, consumer electronics, and transportation witnessed a drastic decline in prices as per the various attributes of the GST structure.

For example, in the automobile sector, the GST tax has resulted in reduced taxes on car types, such as small cars, because the cascading effect of excise duty and VAT no longer exists. The sequential taxing of the cars has resulted in a price reduction of about 10-15% for some of the car types, benefitting both manufacturers as well as consumers.

In the real estate sector, the impact of GST has been mixed, while several builders and developers have handed over the benefits of lower tax liability to homebuyers. It is because GST has allowed an input tax credit on construction materials, reducing overall construction costs and helping the end-user create affordable housing options.

6. Price Decrease Following Increased Competition

One of the understated yet crucial impacts of GST in terms of price reduction is the increase in competition among businesses. In effect, through the standardization of tax rates and the reduction of unnecessary barriers to inter-state trade, GST has managed to ease the burden of doing business across state borders. This naturally increases competition in various sectors as businesses are no longer held back by local tax variations or unnecessary compliance hurdles.

7. Impact on Consumer Goods and Daily Necessities

One of the main promises of GST was that it would reduce the price of essential goods and services, thereby benefiting the common man. While some goods like luxury items have seen a rise in their price, many everyday goods have become cheaper because of GST. Goods such as food items, other home products, and medicines have reduced their tax rates, which, in turn, has brought about lower prices for consumers.

Conclusion

TaxDunia can be described as a reliable partner offering GST consultancy, compliance, and advisory services. We ensure that business houses stay updated in terms of the latest tax regulations to maximize savings and be compliant. TaxDunia has, through simplifying the procedures for taxes, proven to be beneficial for many enterprises operating in the complex world of India’s tax landscape.