Impact of GST on the Indian Economy: Benefits & Challenges

Key Takeaways
 

• GST replaced many old taxes with one simple tax.
   
• It made the tax system easier and more transparent.
   
• It stopped the issue of paying “tax on tax,” which helped lower costs for businesses.
   
• Small businesses still face challenges with filing and following GST rules.
   
• In the long run, GST helps the country grow, supports fintech, and makes India stronger in global markets.

BONUS POINT: THE GROUP OF MINISTERS HAS PROPOSED A FULL GST EXEMPTION ON HEALTH AND LIFE INSURANCE PREMIUMS. WHILE THIS MAY LOWER COSTS FOR CONSUMERS IN THE SHORT TERM, EXPERTS CAUTION THAT INSURERS MIGHT RAISE PREMIUMS LATER TO BALANCE THE LOSS OF INPUT TAX CREDITS.

Goods and Services Tax (GST) is India’s biggest indirect tax reform, introduced in July 2017. It replaced multiple state and central taxes with a single, unified tax system. 

Take the example of Ramesh, a trader from Delhi who sells electronic goods. Before GST, his yearly turnover was ₹5,00,000. He had to pay VAT at 12.5% on sales (₹62,500) and excise duty at 10% on manufacturing costs of ₹3,00,000 (₹30,000). These taxes overlapped, increasing his total tax to ₹92,500. 

After GST was implemented at 18%, he paid only ₹90,000 on his turnover, but he could also claim input tax credit on purchases worth ₹2,00,000. This reduced his final tax liability by ₹36,000. Ramesh’s net tax dropped to ₹54,000. His profit margin improved by almost 8%, and he was able to sell goods at lower prices, attracting more customers.

This clearly shows the positive impact of GST on reducing the overall tax burden for small traders.

In this blog, we will explore what is the impact of GST and how it transformed India’s taxation system, its benefits, drawbacks, and its wider impact on the economy and fintech sector. 

Pre-GST Tax System in India

Before GST, India’s tax structure was a maze of indirect taxes. Businesses had to deal with excise duty on manufacturing, VAT on sales, service tax on services, and Central Sales Tax (CST) for inter-state transactions. This created a “tax on tax” problem, where costs increased at every stage of production and distribution.

Let’s consider Meera, a garment manufacturer in 2016. She produced clothes worth ₹4,00,000. She first paid excise duty of 12% (₹48,000). When she sold these clothes in another state, VAT of 14.5% was applied on the selling price (₹58,000). 

Read More – Disadvantages of GST: What Businesses and Consumers Should Know?

Together, she ended up paying ₹1,06,000 in taxes. Since excise duty was not adjustable against VAT, Meera faced a cascading effect. This made her products more expensive for customers and reduced her profit margins.

To understand this better, let’s compare how the tax system worked before GST and how it changed after GST implementation:
 

The comparison highlights how the unified system improved efficiency, showing the long-term impact of GST on reducing tax complications.

Benefits of GST for the Indian Economy

GST simplified the tax system and made it easier for businesses to work across India. Instead of paying many state and central taxes, companies now deal with one transparent system. It has improved tax compliance, reduced costs, and increased government revenue.

Suresh, an SME owner in Bengaluru, sold furniture worth ₹10,00,000 in 2015. Before GST, he had to pay excise duty of 10% (₹1,00,000) and VAT of 14% (₹1,40,000). His total tax burden was ₹2,40,000. After GST at 18%, his liability was ₹1,80,000. 

However, since he bought raw material worth ₹5,00,000 and already paid GST of ₹90,000 on it, he could claim input tax credit. His final tax dropped to ₹90,000. This helped him save ₹1,50,000 compared to the old system, allowing him to expand production. Suresh’s case is one of many that proves the real-world impact of GST in helping small businesses lower costs and scale faster.

Here’s a table that breaks down the measurable impact of GST across different business activities: 
 

The benefits of GST are not only financial but also structural. By digitising tax filing and improving transparency, it has built trust in the system and encouraged more businesses to join the formal economy.

Drawbacks and Challenges of GST Implementation

Despite its success, GST has not been free from problems. Many small businesses face difficulties in understanding the rules, filing returns online, and paying for digital compliance systems. For some goods, tax rates increased, making them costlier.

Anita, a small shopkeeper in Jaipur, earned ₹8,00,000 annually. After GST, she had to file monthly returns through the GST portal. Hiring an accountant cost her ₹3,000 per month, or ₹36,000 yearly. 

Earlier, she managed tax filings herself with only minor expenses. Although GST made pricing transparent, her compliance cost increased by 4.5% of her income. This reduced her profit margin and made her less competitive. While large companies gained from GST, the impact of GST on micro-retailers like Anita has been challenging.

The following table highlights key drawbacks of GST and shows which groups are most affected by them:
 

While GST simplified the system for larger companies, small businesses faced new hurdles in compliance, technology use, and cost management. These challenges need policy support to make GST truly inclusive.

GST’s Impact on Indian Economy and Fintech Sector

The digital-first approach to filing returns has had a strong impact on GST on India’s fintech ecosystem. GST has not only reshaped taxation but also boosted the fintech sector in India. Since all GST filings are done online, businesses now depend on fintech platforms for tax calculation, invoice generation, and compliance management. This digital shift has created opportunities for startups offering GST software and apps.

Rajesh, the founder of a fintech app in Mumbai, started his business in 2018 with just ₹10,00,000 investment. His platform helped 500 small traders file GST returns in the first year. Each trader paid ₹2,000 yearly for the service, giving Rajesh revenue of ₹10,00,000. 

With GST filings becoming mandatory, his client base grew to 2,000 traders in three years, and his revenue jumped to ₹40,00,000. GST created a market that allowed fintech players like Rajesh to grow rapidly.

Here is how GST has impacted different areas of the fintech industry with examples:
 

This growth in digital tax services directly reflects the transformational impact of GST on tech-driven compliance.

GST and Consumer Price Index (CPI)

GST’s effect on prices has been mixed. At first, inflation rose because businesses needed to adjust to the new system. But over time, the removal of “tax on tax” lowered the prices of many goods. For essentials like food grains, GST was kept low or exempt, protecting households. Luxury goods, however, became more expensive due to higher tax slabs. To understand the real-world impact of GST on household expenses, we must look at how it changed the pricing of essential and non-essential items.

Kavita, a homemaker in Pune, spent ₹15,000 monthly on groceries and household items before GST. Essentials like rice and wheat had a tax burden of ₹500 per month. After GST, these items were exempt or taxed at 5%, reducing her monthly expense to ₹14,500. 

Also Read - Benefits of GST: Key Reasons Why GST is a Game Changer for India

However, when she bought a refrigerator worth ₹25,000, the GST rate of 28% increased the price by ₹7,000 compared to the earlier taxes of around ₹5,000. While her daily shopping became cheaper, bigger purchases became costlier. Kavita’s experience shows how the impact of GST on household spending can be both positive and negative, depending on the product category.

The impact of GST on consumer prices can be understood under three main areas:

• Goods with Reduced Prices: Essential items such as rice, wheat, and medicines saw lower or zero tax rates.
   
• Goods with Higher Prices: Luxury items, automobiles, and electronics became costlier due to higher GST slabs.
   
• Long-Term Stability: Over time, GST has reduced price volatility, making inflation more predictable.

For the common consumer, GST has been a mixed bag, bringing relief in everyday purchases but raising the cost of luxury and durable goods.

Impact of GST on the Common Man

GST has affected people differently depending on what they buy. Essentials remain cheap, but luxury goods and services are more expensive. Transparency in bills has helped people understand the taxes they pay.

Arjun, a salaried employee in Chennai, used to spend ₹12,000 monthly on essentials and ₹5,000 on gadgets. Before GST, his monthly essentials had a tax cost of ₹600, and gadgets had about ₹700. After GST, his essentials dropped to ₹500, but gadgets increased to ₹1,000. His overall spend rose slightly, showing how GST gives both savings and extra costs.

Here are the main ways GST impacts the daily life of an average person:

• Essentials: Food grains, milk, and medicines remain tax-free or at 5%.
   
• Lifestyle Goods: Electronics, appliances, and cars attract a higher GST of 18%–28%.
   
• Clarity in Bills: Every receipt shows GST rates, helping consumers see the actual tax paid.

For the common man, GST ensures fairness and clarity, but it increases the burden when purchasing luxury or branded items.

Long-Term Economic Impact of GST

Over time, GST has made India’s economy more organised. Logistics costs are lower, businesses can expand across states, and exports have become more competitive.

Priya, an exporter from Mumbai, shipped goods worth ₹20,00,000 in 2016. Earlier, she paid multiple state taxes worth ₹1,00,000 on transport. With GST, these taxes were removed, and her cost was reduced to ₹40,000. She saved ₹60,000 annually, which she reinvested in expanding exports to new countries.

These points summarise GST’s long-term economic influence:

• Boost to GDP: GST collections touch new highs regularly, supporting growth.
   
• Lower Logistics Costs: Faster transport as state borders no longer delay goods.
   
• Global Competitiveness: Indian exports are now more price-friendly in global markets.

The long-term view shows GST strengthening India’s position globally by creating efficiency and reducing hidden costs.

Conclusion

GST has changed the way India collects and manages taxes. It has simplified the system, reduced double taxation, and boosted digital adoption. Yet, small businesses still find compliance costly. For fintech firms, GST opened new opportunities to build digital tools. 

For consumers, the effect is mixed, essentials are affordable, while luxuries are costlier. In the long term, GST will likely become simpler, helping India build a stronger, more competitive economy. Overall, the impact of GST has been mixed but promising, and it continues to shape India’s tax and fintech landscape

FAQ:

What is the impact of GST on health and life insurance premiums?
The proposed exemption may lower upfront costs, but insurers could raise premiums later to offset lost tax credits.

What is the impact of GST slab cuts expected by Diwali 2025?
Removal of the 28% slab and shifting 12% goods to 5% could make daily-use items and small cars cheaper.

What is the long-term impact of GST 2.0 on India’s tax system?
Moving from four slabs to just two will make compliance easier and encourage broader participation.

What is the economic impact of GST rate cuts on growth?
Lower rates may reduce government revenue by ₹50,000 crore but could raise GDP growth by 0.6 percentage points.

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