How GST Has Impacted Informal Economy in India
The informal sector holds much significance for any country’s growth and consistent development. India is still a developing country and its informal sector contributes largely to the GDP growth. The informal sector is also known as the unorganized sector and as its name suggests, the informal sector is not governed nor taxed by the government. Informal sector contributes around half of the GDP of the country, and this sector employs more than 90% of the total workforce of the country. This article highlights limitations and benefits for the Informal Sector under GST.
Goods and Services Tax was introduced back in 2017 and it aimed to unify the tax structure of the country. GST is a destination-based tax and there is a threshold limit for the businesses to get registered under it. This tax has subsumed all the previous indirect taxes such as VAT, excise duty, central taxes, service tax, etc. Though the government introduced GST to unify the market and formalize the economy, it did not work favorably for the informal sector. Not much data is available on the impact of GST on the informal sector, still, this article endeavors to explain it.
Informal Sector After GST
Along with other factors GST has caused a whopping 4.3% loss worth around Rs 11.5 trillion in financial year 2023. The informal sector’s share in gross value added or GVA was around 28% before GST implementation though it was around 17% for FY 2023. The share of GVA in manufacturing and other services in FY 2023 dropped to 32.3% and 21.2% from 46.9% and 34.3% respectively.
The number of employees employed in the informal sector has also reduced which could also be caused by the emergence of e-commerce. Simplified taxation has promoted businesses on digital platforms causing a sharp dip in employment in the informal sector.
GST implementation has resulted in giant tax collections paving the way for the formalization of the economy. Increased compliance has caused tremendous loss to the small and medium enterprises which makes up for a large part of the informal sector.
Limitations for Informal Sector Under GST
- Increased compliance cost due to technical upgradation requirements
- No user-friendly IT infrastructure
- Registration requirements to conduct businesses
- Several tax slabs applicable to goods and services
GST has brought significant changes to the Indian taxation system. It has increased government revenue and helped in formalizing the informal sector. It has also affected the informal sector negatively which makes up for the 40% of the GDP growth. The government can take measures to address the prevalent issues to ensure the steady growth of the informal sector while regulating the taxes for taxpayers.
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