Why is GST Important for India?

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In July 2017, the government of India passed the most important tax reform law since its independence. It is said to unify the country’s 2 trillion USD economy and push it forward. Why is that? What makes GST so important?

Right now, India has two types of taxes — Direct and Indirect. Simply put, the Direct Taxes cannot be passed to anyone else, while the Indirect ones — can be. For example, the tax on income is a Direct Tax, and you alone are responsible to pay it. In other words, you cannot pass it on to anyone else — it’s your own liability.

Indirect Taxes are a bit more complex. They can be passed onto someone else, and currently, they are in the form of VAT. When a customer buys a product, they are obliged to pay a certain percentage on top of the price of the product. The vendor has already paid VAT to the supplier, and would have to additionally pay VAT on top of the price of the product to the government. That is why the vendor increases the end price of the product and passes the responsibility of paying for the VAT to the customer.

The new GST tax reform will change all of that. There will be a system of Input Tax Credit which will allow vendors to claim the tax that has already been paid. This will decrease the end price of the product. People will be able to buy more, which will stalemate the country’s economic growth.

Prime Minister Modi had this to say about the new tax reform: “GST [also] intends to bring in economic reforms. It is a great example of Co-operative Federalism which shall facilitate inclusive growth of the nation. With the launch of GST, Team India has proven its potential and diligence.”

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