What is the impact of GST on income tax?

Raju Choudhary

Staff member
GST is strictly an Indirect tax, while Income tax comes under Direct tax. So, theoretically the impact of GST on your Income tax is zero. Indirect taxes include on all the Goods and Services which we use in our daily lives and Direct tax is some thing which you pay on your annual income. Indirect taxes are considered regressive since its marginal impact on the economically weaker sections of society is far greater. India’s direct to indirect tax ratio is roughly 35:65. This is in contrast to most OECD economies where the ratio is the exact opposite, 67:33 in favour of direct taxes.

The government has launched GST with a dedicated digital system, called GST Network (GSTN), to manage all GST related things online from a single portal. This also makes it simple for businesses to maintain proper tax records and calculate their annual income correctly. This, in turn, makes it easy to calculate their income tax liability.
Income tax department can also easily figure out the tax liability of a particular person or business by comparing their returns for the details of total turnover to find out any discrepancy and catch tax evaders.
Before GST, many businesses used to report a different stock value in their VAT returns as compared to their IT returns, usually with the aim to commit tax fraud or for maintaining a better credit score. However, GSTN makes it easier for income tax department to match the returns and calculate the correct income tax liability of a particular person/business. This, in turn, will boost the collection of taxes.
GST may also result in a possible increase in the income tax for the service provider. GST has input credit mechanism which reduces the cost of goods which in turn increases the profit for the seller.
Similarities between Income Tax and GST
One major similarity between income tax and GST is that both are borne by the consumer. We pay income tax on our income/profits and GST on the use of various sectors, services and products such as restaurants, theatres and more.
GST vs Income Tax
Here are the differences between these two major tax systems.
  • GST is levied on consumption while Income tax is levied on profit/income.
  • GST is an indirect tax while IT is a direct tax.
  • GST is a multi-stage tax levied at each stage of the supply chain while income tax is levied once a year on the gross income minus eligible savings (as per 80C).
  • GST returns are filed quarterly/monthly depending on the return type while income tax return is filed annually.
  • Income tax has four slabs (0, 5, 20, and 30) while GST has five tax slabs (0, 5, 12, 18, and 28).
  • The annual threshold for income tax payment is INR 2,50,000 while businesses with an annual turnover of over INR 20,00,000 need to register for GST.
  • GST (indirect taxes) is known to have more effect on economically weaker sections while income tax mainly affects middle and high-class citizens.
  • The overall tax collected through GST is higher than what is collected through income tax.
  • GST has the provision of input tax credit (ITC) which allows taxpayers to claim a refund of the tax, however, income tax has no such provision.
The introduction and digitization of GST will not only ensure a stronger indirect tax system but also it will strengthen the existing income tax system by providing a reliable database for income tax department to check the collective revenue and find tax discrepancies, if any.