Advantages and Disadvantages of GST in India

When the Goods and Service Tax Act was initially introduced in the country, it was hailed as the greatest tax reform. The aim of the GST (Goods and Service Tax) act is to decrease the quantity of indirect taxes and to unify the Indian market. Following the implementation, the Government has received numerous feedback about the advantages and disadvantages of GST. Regardless, the taxpayers can make an informed decision whether the new regime is beneficial or not by weighing the advantages and disadvantages of GST in depth.

In this article, we will discuss the pros and drawbacks of GST, in a way that helps you to maximize your GST-related benefits and find ways around its shortcomings effectively.

GST Benefits

The implementation of GST in India has helped businesses and industry in a very positive way. The benefits of GST in India have been experienced by many. The companies that have a turnover of up to ₹75 lakh can benefit from the various composition schemes provided under the GST act. They now need to pay only 1% of their turnover. Hence, the taxation process has been simplified for them. GST has helped decrease corruption and regulates the businesses that deal in sales without receipts. GST has also helped decrease taxes on certain products like cars and smartphones, ranging from 2% to 7.5%.

Advantages of GST in India

The following points explain the advantages of GST:

GST Put an End to the Cascading Effect of Tax

GST is an all-inclusive indirect tax that was introduced with the vision of bringing all the indirect taxes under one umbrella. As a result, this helped in eliminating the cascading effect that was prevalent in the previous tax structure. Let’s take a look at the below example to better understand what cascading effect is and how the GST helped change it:

Previous Tax Regime

Let’s assume that a supplier is offering his services for Rs. 50,000 and is charging a service tax of 15% (50,000 x 15% = Rs. 7500).

Now say, he also buys supplies for his office for Rs. 20,000 and pays 5% as VAT (20,000 x 5% = 1000).

This means that the supplier had to pay an output service tax of Rs. 7500 and did not receive a deduction of the VAT that he paid.

This brings his total outflow to Rs. 8500.

Under GST Regime

This is what the suppliers will look under the new GST regime:

Lesser Compliance to be Followed

Before the GST act was implemented in 2017, we had several different indirect taxes. Naturally, there were various compliance rules associated with each of these taxes which made things complicated.

Since the implementation of the new tax regime, there is only a single unified return to be filed by the taxpayers. The GST has around 11 returns, only 4 of which are basic taxes that apply to all the registered taxpayers regardless of their business type. For ease of filing these returns, only the main GSTR-1 is manually populated while GSTR-2 and GSTR-3 are automatically populated.

Greater Threshold for Registration

During the VAT structure, a business having an annual average turnover of more than Rs. 5 lakh was liable to be taxed. The thing to note here is that this limit varies in different states of the country. Further, business entities with turnover less than Rs. 10 lakh were exempt from paying service tax.

Under the GST tax structure, this threshold has been raised to Rs. 20 lakh, which eases the pressure from many small businesses.

Improved Efficiency of Logistics

Under the GST Act, the restrictions on inter-state movement of goods have been vastly reduced. Prior to this, the logistics industry was having to maintain multiple warehouses across states in order to avoid the related state entry taxes and CST. Further, companies were forced to operate these warehouses below their capacity, which led to an increase in operating costs. The implementation of GST meant that the restriction on inter-state movement of goods has been relaxed.

As a result of these changes, companies and warehouse operators are now encouraged to set up warehouses in more strategic locations rather than every other city on their usual delivery route. This has greatly reduced unnecessary logistics costs and in improving the profit of businesses involved in the supply of goods.

Easy Online Procedure

With the advent of modern technology, everything has gone online. The online world has made things easier for all of us. GST has also followed these tracks and has a dedicated online portal. The entire process of registration to filing returns can be done online in a very convenient way. This has greatly benefited start-ups as they do not need to go from one place to another to get various registrations such as VAT, service tax, and excise.

Growth in India’s GDP

It is believed that the implementation of GST would lead to an increase in the GDP of the country. A positive impact has been seen on the GDP.

Another additional advantage of GST is that it would decrease the plausibility of tax evasion in the country.

Disadvantages of GST in India

The following are some of the drawbacks of the GST Act:

Increased Software Costs

Before the GST regime, most businesses in India used a simple ERP or accounting software to handle their daily operations. These software and solutions were formulated in accordance with the then-existing tax laws and structures. With the implementation of GST, businesses are now required to upgrade to more expensive GST-compliant software or specialized GST software. This means an increase in operational costs in the form of software purchases and the associated training to employees.

Increased Tax Burden on SMEs

One of the main disadvantages of GST is that it has increased the tax liabilities on small to medium-sized businesses. This is so because, under the previous tax regime, excise had to be paid by businesses having an annual turnover of more than Rs. 1.5 crores. However, under the new tax structure, any business with an aggregate annual turnover of more than Rs. 20 lakh is liable to be taxed.

However, this tax structure offers a composition scheme for SMEs that have a turnover of less than Rs. 1 crore. Under this scheme, SMEs are obligated to pay only 1% of their annual turnover. However, if a business decides to use this composition benefit, it cannot claim the input tax credit.

Difficult Migration to Online Filing System

Since the new tax structure came into effect, almost every aspect of the tax is handled online- from registration to submitting tax returns. With the advent of modern-day technology, the adoption of digital solutions by businesses is gradually increasing. However, little space is dedicated to such solutions for small businesses. Although the online system introduced by the government is very convenient for business owners, it still has a steep learning curve that can prove to be challenging for small businesses.

Compliance Burden

Under the new taxation system, companies now have to register with GST in all the states that they operate in. As a part of the registration process, businesses must issue GST-compliant invoices, maintain electronic records, and file returns. The cost of all these services has massively increased the burden on the small and medium businesses in the country. Further, several businesses find it difficult to adapt to GST because the infrastructure of all Indian states is not ready to implement e-governance.

Loss in the real estate sector

There has been a major impact on the real estate market due to the implementation of the GST. It has led to an 8% increase in the price of the real estate sector. This has led to a 12% decrease in the demand for properties. But it might also be a short-term trend and might not last forever.

In a nutshell

In conclusion, we would like to say that change is slow, always has, and always will be. The government is actively trying to tackle all the drawbacks that they have faced with the GST. It is important to note that all the global economies that have implemented the GST before us have also faced similar starting troubles. These economies have also found a way to overcome the hurdles to enjoy the advantages of GST.

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