How GST Enhances Competitiveness Among Domestic Firms The implementation of the Goods and Services Tax (GST) represents some of the largest tax changes India has seen since the country’s inception. GST was effective July 1, 2017; as such, it replaced several other indirect forms of taxation with just one tax system instead. In addition to reducing the complexity of compliance, GST has also increased competition among domestic firms by reducing the impact of cascading taxes, improving compliance through better audit trails, and providing greater transparency to tax investigations!
Removal of the Ripples from Indirect Taxation As well as having many tiers of unrectified/simplified indirect tax, prior to GST businesses paid taxes on taxes which increased their overall production costs whilst providing less price competition than competitors. GST provided an Input Tax Credit (ITC) mechanism that enabled businesses to receive a credit for taxes they paid/taxes on inputs supplied to them by their suppliers as long as they met certain criteria.
Benefits: An overall reduced tax burden Reduction in production costs The ability to price products competitively both domestically/internationally Because GST has provided a lower overall revenue collection, each of these lower costs leads to increased profit margins/how businesses can compete with one another in today's marketplace.
The Establishment of a Consistent, Nationalized Marketplace Prior to GST there were many different tax rates and entry taxes set by each State of India for shipping products from one State to another. These entry taxes presented many challenges to businesses wishing to ship their products from one State to another. Through GST, these problems were addressed by establishing "One Nation, One Tax".
Benefits: One location at which a business can ship their product to its customers. Reduction in time associated with transporting products within India. Reduction in total delivery/warehouse expenses associated with transporting products within India. Increased economies of scale for businesses. Because the establishment of a consistent, nationalized marketplace has occurred in India, businesses can now expand their operations across all states of India without any difficulty whatsoever.
Refer here: GST Rule 86B Explained - Key ITC Restrictions for Businesses
Improved Efficiency in the Supply Chain Prior to the Goods and Services Tax (GST) being implemented, businesses had established multiple warehouses within each state primarily to deal with the problem of taxable items. GST changed the way businesses made decisions regarding supply chains away from one based on legislation and towards one based on efficiency. The end result for businesses has been:
Consolidated Warehouses Optimised Distribution Supply Networks Reduced Operating Costs Quicker Delivery Times Having efficient supply chains provides businesses with a greater chance of being able to compete with other domestic and foreign businesses.
Refer this: What is Supply Chain Finance
Increased Transparency and Formalisation of Business GST introduced:
Electronic Invoices (E-invoicing) Digital Filing of Returns GST Identification Number (GSTIN) Based Tracking (GST Tracking System) Transportation/Emergency Way Bill (e-way Bill) This electronic environment created with the above introduces a significantly lower risk of tax-related crimes and will help promote businesses to become formalised. How This Helps Competitiveness:
Greater level of trust given to businesses that are formalised. Enhanced access to credit through banks and financial institutions. Better integration into global markets. Formal and compliant businesses will continue to build a reputation of long-lasting credibility, resulting in a sustainable source of revenue and funds from investors.
Increase in MSMEs and Startups The Goods and Services Tax (GST) offers a lot of benefits to small businesses, these include;
Composition scheme for small taxpayers Exemptions on thresholds Easier online compliance Input tax credit (ITC had already been deducted) on purchases. These measures help MSME businesses reduce costs compared to big companies and level the playing field to compete.
Export Competitiveness is Increased Under GST, exports are treated as zero-rated supplies, therefore;
There is no GST applied to exported goods Refund of Input Tax Credits (ITC) on purchases and inputs used for exporting A reduction in the cost of exporting goods. This will help Indian goods be more competitive in the world market, as they will not have the burden of indirect taxes on them.
Reduced Costs of Logistics and Compliance Prior to GST, companies had to;
Have separate registrations in every state File multiple tax returns Complete complex documentation in each state for tax purposes After the introduction of GST, companies now would;
Only have to register once per state Only have to use one common tax structure across the country Complete all tax-related documentation electronically Save on compliance costs that can be used in innovation, marketing, and business growth. Promoting Fair Competition GST has levelled the competitive playing field and has taken away the advantages that tax evading firms had prior to the implementation of GST. Because there is electronic monitoring of compliance with GST;
Evasion of taxes will be more difficult Non-compliant informal players will be forced to become compliant Fair competition will increase A transparent tax system provides a strong foundation for domestic honest businesses. Pre-GST vs Post-GST Impact on Domestic Firms Factor Pre-GST Regime Post-GST Regime Impact on Competitiveness Tax Structure Multiple taxes (VAT, Excise, Service Tax, CST, Octroi) Single unified tax system under Goods and Services Tax Simplifies taxation and reduces complexity Cascading Effect Tax on tax was common Input Tax Credit eliminates cascading Reduces production cost and improves pricing Interstate Trade Entry tax and CST created barriers Seamless movement of goods across states Expands market access nationwide Compliance Process Manual filings, multiple authorities Online return filing and GST portal Reduces compliance burden Supply Chain Setup Warehouse decisions based on tax savings Logistics optimized for efficiency Lowers logistics and warehousing costs MSME Support Limited tax credit flow Composition scheme & ITC benefits Improves MSME competitiveness Export Treatment Embedded taxes increased export cost Zero-rated supplies with refund Boosts global competitiveness Transparency Higher scope for tax evasion Digital tracking, e-invoicing, e-way bills Ensures fair competition
Conclusion GST has brought about a complete change in the way that indirect taxes are collected in India. The removal of barrier taxes, reduction of cascading taxes, increased transparency, and streamlining of logistics allows GST to make domestic companies more competitive. The efficiencies of GST, through its fairness and merging of markets, have all been important for India's sustainable economic development. As time goes on, it is anticipated that GST will also continue to elevate India's status as a global centre for manufacturing and services.
Suggested Read: How GST Enhances Competitiveness Among Domestic Firms
FAQs In what way does GST lower the cost of production to producers in India? With the introduction of input tax credit through GST, the cascading effect of taxes has been removed; therefore, the overall cost of production will be lower.
In what way does GST set up a single national market? Instead of paying multiple taxes imposed by many States, GST has set up a single taxation process. This allows for goods to be moved freely throughout India without restriction.
Will GST aid India’s export competitiveness? Yes. Zero-rated exports mean there will be no taxes on the goods exported from India and all input taxes paid on the goods will be refunded.
In which way has GST encouraged fair competition amongst businesses? Digital compliance will reduce tax evasion and require all businesses to comply with the same tax accountable process.
In what manner will GST assist MSMEs? The use of a composition scheme and the exemption of small business below a specified threshold level, along with ITC claims, will minimize compliance costs and increase profitability to small businesses.
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