Synopsis: The new GST regime has brought a unified tax system to ease taxpayers from cascading taxes and revive the finance sector like never before. Yet, it also poses new challenges for businesses to comply with frequently changing terms and conditions. Read to know more.

The Indian Government implemented a single taxation system under the Central Goods & Services Tax Act on April 12, 2017. The aim was to curb the cascading taxes on transactions to make goods and services comparatively cheaper for consumers. As expected, this unified tax system successfully reshaped taxation and the fabric of India’s financial sector. However, it has posed numerous challenges for small to medium businesses. In this regard, let’s look into the new GST regime’s profound positive and negative impacts on the Indian financial sector. Before diving deeper, let’s examine how the new GST system has impacted our GDP.

The Impact of the New GST Regime on National GDP

As per the GDP data for FY 2023-24 2nd Quarter (July to September 2023), the Indian economy witnessed an impressive growth of 7.6% in the Q2 of the current fiscal year. It is way higher than the 6.2% growth for Q2 of the last fiscal year. Overall, this is a highly positive sign for the Indian economy.

Some Recent Amendments

The government has decided to decrease the limit for businesses to generate e-invoices for B2B transactions from Rs 10 crore to Rs 5 crore while rolling out the automated return scrutiny module for filling goods and service taxes in a backend for central tax officers. These changes are expected to curb the rising cases of GST fraud and fake invoices in MSMEs and amplify the government’s overall GST revenue collections. 

How the New GST Regime is Positively Influencing the Indian Economy

Here are some key areas where the Indian economy has witnessed a positive impact from the new GST regime.

Systematic Tax System

Before 2017, businesses had to meet multiple tax compliance requirements, such as value-added tax (VAT), excise duty, service tax, central sales tax, entertainment tax, and luxury tax. The new tax regime has replaced multiple indirect taxes with a single tax. As a result, the government has made it easy for businesses to meet compliance without much complexity.

Increased Tax Compliance

With new e-service rollouts, businesses are finding it easier and less troublesome to meet tax compliance from the comfort of their mobiles or laptops. All e-way bills have been interlinked with government portals to increase the effectiveness of tax enforcement and ensure compliance. This has increased the tax base and the government’s overall tax intake.

Thriving Economy

The new GST regime eliminated interstate taxes by removing checkpoints and 10-11 taxes on road transports. As industries save on logistical expenses, the Indian economy has thrived, especially in the manufacturing and logistics sectors.

Positive Impact on GDP

According to research by NCAER, removing cascading taxes on goods and services and reducing logistics costs are the key factors behind increasing India’s GDP by 1% to 3%.  A few studies state that the GDP rate will touch the 6.4% mark by 31st March 2024, majorly driven by the benefit of the new GST regime on transport infrastructure, logistics, and the overall business environment. This is much better than the 1.5% projected economic growth for the U.S. in 2024.

The Impact of the New GST Regime on the Small Business Sector 

While the new GST regime is boosting the economy and national GDP, it creates new challenges and opportunities for small businesses in India. While the benefits are in terms of a streamlined tax system and technological shift, the challenges are transformational hiccups, a higher tax burden, and a rise in operational costs. Let’s analyze the benefits and challenges small business sectors face for a better understanding.

Benefits of the New GST Regime on the Small Business Sector

Enhanced Market Access for Small Businesses in India

The GST amendments now allow unregistered and composition taxpayers to sell goods via e-commerce without mandatory registration. It will broaden their market reach. This government initiative, effective from October 2023, significantly aids small businesses in accessing the vast e-commerce sector without the burden of registration.

Streamlined Tax Structure:

With a simplified tax structure, small businesses are no longer required to process multiple taxes. This is making it easier to comply with tax regulations over time.

Technological advancements:

The online-based GST system is encouraging small businesses to adopt modern digital solutions. This is, indeed, increasing the operational efficiency of the companies as they are learning to use the technology to automate their other manual tasks with ease.

Potential for long-term growth:

Though the new GST system seems challenging at first, it has the potential to offer long-term economic growth to small businesses through more consistent and streamlined tax policies. 

Challenges of the New GST Regime on the Small Business Sector

Despite a huge upliftment to the Indian economy and national GDP, the new GST regime comes with the following challenges.

Transformation Hiccups

Small businesses are finding it challenging to switch to a new online-based GST filing system from the traditional pen and paper based system. They are also facing issues adjusting to the new compliance standards, and overcoming those challenges is temporarily disrupting their business operations.   

Higher Tax Burden for SMEs

Even with an annual turnover of Rs 20 lakh, small businesses have to pay GST now. Businesses with annual turnover exceeding Rs 1.5 crore used to be in this bracket. At the same time.

A Rise in Operational Costs

The new GST system is complex to understand and process for small businesses with little to no online tax filing systems expertise. They are employing experts to meet changed compliance, resulting in additional expenses. Companies with dedicated teams are also experiencing ongoing investments in training and system upgrades to match continuous updates and changes in GST laws.

Penalties for Non-Compliance

Many small to medium businesses are progressively adapting to the new GST regime with each passing month. However, the government has created monetary penalties and prosecution to encourage compliance. In this regard, many trade groups advocate for a lenient initial approach by the government, as non-compliance may sometimes be erroneous rather than intentional.

End Thoughts

As we analyzed, the new GST regime has profoundly changed India’s financial sector. The simplified tax structures, transparency in filings, and digital innovations are commendable. However, there are still challenges, particularly in compliance and for SMEs. The government is expected to likely refine the GST system to stride towards a more unified and stable economic framework. Read this guide to know the impact of the new GST regime on business loans.