The introduction of Goods and Services Tax (GST) in India was a significant tax overhaul with the objective of establishing a streamlined and effective indirect tax structure. Its primary goal was to instigate structural transformations, stimulate economic progress, simplify tax procedures, and enhance tax adherence nationwide. It has yielded numerous advantages for both the state and central administrations.

Here are the key benefits of GST for State and Central Governments

Benefits for State Governments

Increased Revenue: The implementation of GST has broadened the tax bracket, resulting in a surge of income for state governments. It has taken over numerous state-level taxes, including Value Added Tax (VAT), entry tax, and entertainment tax, among others. The consolidated tax system guarantees that a greater number of businesses and transactions are subjected to taxation, leading to a rise in tax revenues.

Improved Compliance: The tax regulations have become easier for businesses to comply with, thanks to GST’s streamlined tax structure and technology-based procedures. As a result, taxpayers have become more compliant, which has reduced tax evasion and boosted revenue collections for state governments.

Enhanced Inter-State Trade: The elimination of entry taxes and other barriers through GST has enabled seamless transportation of goods and services across state borders, leading to reduced logistical complexities, enhanced supply chain efficiency, and a surge in inter-state trade. Consequently, state governments have witnessed a rise in economic activity, business expansion, and tax revenue generated from inter-state transactions.

Elimination of Cascading Effect: State governments also benefit from the elimination of the cascading effect of taxes under GST. GST enables businesses to claim input tax credit on taxes paid at the previous stage of the supply chain, ensuring taxes are only levied on the value added at each stage. This simplifies tax administration, reduces tax burdens on businesses, and enhances competitiveness, ultimately leading to increased tax revenue for state governments.

Simplified Compliance for Small Businesses: Small businesses with an annual turnover below a certain threshold can benefit from GST’s composition scheme. This program allows eligible businesses to pay taxes at a reduced rate and enjoy simplified compliance requirements. As a result, state governments can expand their tax base by attracting more small businesses and enhancing tax compliance within this sector.

Elimination of Checkposts: The implementation of GST has done away with the requirement for checkposts at state borders. This has led to the removal of physical obstructions and the adoption of electronic waybills, which have facilitated seamless transportation of goods across state boundaries. The resultant reduction in transit time, eradication of corruption and harassment at checkposts, and enhancement of logistics efficiency have been significant benefits of this move.

Uniformity and Standardization: The implementation of GST has resulted in the establishment of consistent tax rates, exemptions, and product/service categorizations throughout India. This has streamlined the tax administration process and minimized conflicts associated with tax rates and classifications. The standardization has also fostered improved collaboration and coordination between states, ultimately reducing tax-related disputes and benefiting state governments.

Benefits for Central Government

Broadened Tax Base: The implementation of GST has considerably expanded the tax base of the central government. Instead of several indirect taxes like central excise duty, service tax, and central sales tax, a solitary tax has been introduced to encompass a wider range of economic activities. This expansion of the tax base has led to a surge in tax revenue for the central government.

Simplified Tax Structure: The tax structure has been streamlined by GST, which has established a consistent tax rate and a standard set of regulations throughout the nation. This simplification has facilitated business compliance, minimized bureaucratic challenges, and increased tax administration efficacy for the federal government.

Streamlined Tax Administration: By implementing GST, tax administration has been centralized under the Goods and Services Tax Network (GSTN), which offers a unified platform for registration, return filing, and tax payment. This centralized approach fosters better coordination between central and state tax authorities, facilitates data sharing, and simplifies the tax administration process for the central government.

Enhanced Economic Growth: The economy experiences a positive impact from GST, as it leads to an increase in inter-state trade, a decrease in logistics costs, and an improvement in the ease of doing business. This, in turn, contributes to the overall growth of the economy. A thriving economy results in higher tax collections for the central government due to an increase in income, consumption, and economic activities.

Harmonized Indirect Tax Structure: The implementation of GST has simplified the previously intricate network of indirect taxes, resulting in a unified tax system that is consistent throughout the nation. This simplification has made it more convenient for businesses to operate across state lines and has lessened the burden of compliance for taxpayers. Moreover, the harmonized structure has enabled the central government to exercise superior control and supervision over the entire tax administration.

Reduction in Tax Leakage: The input tax credit system of GST is a comprehensive mechanism that aids in curbing tax leakage and enhancing tax collection efficiency. It ensures that the taxes paid on inputs are accurately offset against the taxes payable on outputs, thereby reducing the likelihood of tax evasion or leakage. This system is beneficial to the central government as it improves tax compliance and revenue generation.

Better Monitoring and Data Analytics: The implementation of GST has facilitated the digitization of the tax system, which has resulted in improved monitoring and data analytics for the central government. With the availability of real-time data, tax evasion can be identified, business trends can be analyzed, and effective tax policies can be formulated. This data-driven approach supports the central government in making informed decisions and enhancing tax administration.

Reduction in Tax Administration Costs: The tax administration processes have been simplified by GST, offering a centralized system for registration, filing, and payment. This results in decreased administrative expenses for businesses and the central government. The standardization of processes and automation aids the central government in allocating resources more effectively and concentrating on strategic tax policy issues.

It is crucial to emphasize that the implementation of GST benefits both the state and central governments. However, the allocation of revenue between them is determined by a revenue-sharing mechanism based on the recommendations of the GST Council.

Hi, I am Nikesh Mehta, owner and writer of this site. I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected].