The Goods and Services Tax is regarded to be one of the most noteworthy tax reforms in India. Regardless, the debate on whether the implementation of this new regime is a wise decision or not is still ongoing.
Nevertheless, taxpayers can ascertain whether the GST regime is beneficial for them or not by weighing the advantages and disadvantages of GST carefully. They also need to understand the fundamentals of the concept in-depth.
The Goods and Service Act was implemented in 2017 to eliminate the cascading tax effect and simplify the indirect tax regime.
This tax regime was introduced to replace the several indirect taxes which were applicable on goods and services and were imposed by the state and central governments at various stages.
Its simplified approach aims to help the government achieve the ‘One Nation One Tax’ objective.
This table focuses on the indirect taxes subsumed by GST –
|Jurisdiction of Tax
|Types of Tax
|Indirect taxes levied by the Central Government of India
|Indirect taxes levied by the State Government in India
Keeping these details in mind, let’s proceed to find out more about the GST advantage and disadvantage.
The advantage and disadvantages of GST are discussed below –
These are some prominent benefits of GST in India –
GST is an indirect tax that helps to bring indirect tax regimes under one umbrella. This eliminates the cascading tax effect or tax on tax process efficiently.
To understand the impact of such elimination, let’s glance through this example below.
- Pre-GST Regime
A business consultant extends services at Rs.50000 and levies a service tax at the rate of 15%, i.e. Rs.7500 (50000×15%). The consultant purchased office supplies at Rs.20000 and paid VAT at the rate of 5% without any deduction, i.e. Rs.1000 (20000×5%). The total cash outflow would amount to Rs.8500.
- Post-GST Regime
A business consultant’s cash outflow will amount to –
GST levied on services at the rate of 18%, i.e. Rs.9000 (50000×18). The GST applied to office supplies is subject to deduction. So, the net GST amounts to Rs.8000 (9000-1000)
With the implementation of GST norms, the minimum threshold limit for registration has increased.
Previously, under the VAT regime, all businesses with a turnover above Rs.5 lakh (limit used to vary among states) had to pay VAT. However, under this new GST regime, this threshold limit increased to Rs 20 lakh, providing relief to several small service traders.
Under the previous tax regime, both service tax and VAT extended different compliances.
For instance, excise returns were filed monthly whereas, in the case of service tax, companies and Limited Liability Partnership filed them monthly, and partnerships and proprietorships filed them quarterly.
Conversely, in the case of VAT, the filing of returns varied largely. Nevertheless, with GST in the picture, taxpayers are now required to file only one return.
Businesses with an annual turnover between Rs.20 lakh and Rs.75 lakh are eligible to lower their taxes with the help of the Composition Scheme. This option has not only lowered the applicable tax rate but has also reduced the compliance burden to a great extent.
This pointer proves a vital parameter to weigh the advantages and disadvantages of GST.
Taxpayers can now register with GST and file tax returns online.
The simple interface and hassle-free approach have made the process less cumbersome. It is believed that start-ups are among the most benefited. Also, it has proved useful in establishing clarity regarding taxation jurisdiction between State and Central government and, in turn, facilitating smooth assessment.
Previously, to avoid CST and state entry taxes, the Indian logistic companies used to maintain multiple warehouses across states. Furthermore, such warehouses had to operate below their capacity. However, with GST, restrictions on inter-state movement have reduced significantly.
Resultantly, warehouse operators and e-commerce aggregators are now able to set up warehouses at the most convenient locations. This has allowed them to get rid of unwarranted logistic expenses and has increased profitability.
Other than these, GST has brought unorganised industries like textile and construction under its regulation and has made them accountable. Regardless, to gauge all advantages and disadvantages of GST successfully, it is crucial to know about its drawbacks in detail as well.
The major drawbacks are as follows –
GST had directed businesses to update their old accounting to GST-compliant software or ERP to keep their businesses running.
Nonetheless, the cost of purchasing, installation of software, along training employees to use GST-compliant software can be quite substantial. Also, adherence to GST norms has increased the operational cost for small businesses as more firms are now forced to hire tax professionals to become more GST-compliant.
Under the old tax regime, only businesses with an annual turnover of more than Rs.1.5 crore had to pay excise duty. However, under this new tax regime, businesses with an annual turnover of over Rs.40 lakh must pay GST.
This taxation regime has made it mandatory for companies to register with GST in all states they operate in. The entire process of registering with the regulating body, issuing GST-compliant invoices, maintaining digital record keeping, and filing returns have increased the burden on SMEs and others significantly.
Additionally, the infrastructure of all states in India is not equipped to implement the e-governance model followed by GST.
There's a lack of awareness and resources to comply with the GST system. Many GST taxpayers fail to understand the nuances of the system resulting in no or less payment of the tax. The ultimately attracts penalties and fines which elevates their costs.
Resultantly, several companies find it challenging to adopt or transition into this regime. Based on this information, a tax-paying individual can develop a better understanding of the advantages and disadvantages of GST. In turn, it will help them develop ways to maximise their GST-related benefits and find ways around its shortcomings effectively.