The Goods and Services Tax is regarded to be one of the most noteworthy tax reforms in India. Regardless, the debate whether the implementation of this new regime is a wise decision or not is still on-going. 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.

What is GST?

The Goods and Service Act was implemented in 2017 to eliminate the cascading tax effect and to 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
  • Central Sales Taxes
  • Service Tax
  • Special additional custom duty
  • Countervailing Duty
  • Central Excise Duty
Indirect taxes levied by the State Government in India
  • Luxury tax
  • State VAT
  • Purchase tax
  • Taxes on Advertisement
  • Octroi duty
  • Entry tax
  • Tax on lottery, gambling and betting

GST is applied to the market price of products and services. The customers pay it on their purchases. The same is collected by the seller and is paid off to the government. Notably, the rates of GST levied on different goods and services are the same across India. Nonetheless, products and services are categorised under different tax slabs for payment.

For instance, goods that fall under the luxury and comfort category are placed under higher tax slabs, whereas, necessities are categorised under lower slabs. GST’s main objective is to facilitate uniform distribution of wealth among Indian residents.

Keeping these details in mind, let’s proceed to find more about the GST advantage and disadvantage.

What are the Merits and Demerits of GST?

The advantage and disadvantages of GST are discussed below –

a) Advantages of GST

These are some prominent advantages of GST –

Invest in elss funds
  • It eliminated the cascading tax effect

GST is an indirect tax that helps to bring indirect tax regime under one umbrella. This eliminates the cascading tax effect or tax on tax process efficiently. To understand the impact of such elimination lets 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)

  • Higher threshold limit

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.

  • Lesser number of compliances

Under the previous tax regime, both service tax and VAT extended different compliances. For instance, excise returns were filed monthly whereas in case of service tax, companies and Limited Liability Partnership filed it monthly, and partnership and proprietorship filed them quarterly. Conversely, in case of VAT, the filing of returns varied largely. Nevertheless, with GST in the picture taxpayers are now required to file only one return.

  • Composition Scheme 

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 in the advantages and disadvantages of GST.

  • Hassle-free online process and reduced litigation 

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.

  • Improved logistics

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, restriction on inter-state movement has 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 details as well.

b) Disadvantages of GST

The major drawbacks are as follows –

  • Increased operational cost

GST had directed businesses to update their old accounting to GST-compliant software or ERP to keep their businesses running. Nonetheless, the cost of purchase, installation of software along with 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.

  • A higher tax burden for SMEs

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.

  • Compliance burden

This taxation regime has made it mandatory for companies to register with GST under 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. 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.