Introduction of GST (Goods & Service tax) has been one of the biggest tax reforms in the Indian economy. This unified taxation structure absorbs many indirect taxes which were earlier imposed by central and state governments such as excise, VAT and service tax, etc. It is levied on both goods and services sold in the country. Let us examine the advantages and disadvantages of GST and summarize than as under.
1. Elimination of cascading effect of tax: –
GST is a comprehensive indirect tax which is aimed to bring different indirect taxes under one cover. One of the major implication of GST is the removal of the cascading effect which is a “tax on tax”. To explain this effect, consider an example.
- Before GST: – A consultant offering services for Rs. 50,000 and charges a service tax of 15% and Rs. 7,500. He then buys office supplies for Rs. 20,000 paying 5% vat is Rs 1000. He had to pay Rs. 7,500 as output service tax without getting any deduction of Rs. 1000 VAT already paid on stationery. His total outflow as tax is Rs. 8,500.
- Under GST
|GST on services of Rs. 50,000 e 18%||Rs. 9000 –|
|Less: GST on office supplies of Rs. 20,000 e 5%||Rs. 1000 –|
|Net GST to pay||Rs. 8000 –|
2. Higher threshold limit for registration
Before GST, under the VAT structure, any business with a turnover of more than Rs. 5.00 lacs (in most states) was liable to pay VAT. This limit was used to defer from state to state. Also, service tax was exempted for service providers with a turnover of less than Rs. 10.00 lacs.
After GST, however, this threshold limit has been increased to Rs. 20.00 lacs, which exempts many small traders and service providers.
The threshold limit is tabled asunder.
|VAT||5 lacs in most states|
|Service tax||10 lacs|
|GST||20 lacs (10 lacs in NE states)|
3. Composition scheme for small business
Under GST, small businesses, with a turnover of Rs. 20 lacs to Rs. 75 lacs can be benefited as it gives them the option to lower the taxes by utilizing a composition scheme. Under this scheme, any business with a threshold limit of turnover of Rs. 1.5 crore (modified) has an option to pay a fixed rate of GST i.e. 10%. This move has significantly brought down the tax and compliance burden or many small businessmen and traders.
4. Online easy and simple procedure
The entire process of GST from registration to filing returns has been made online. This has been particularly very convenient to startups as they are not required to run from pillar to post to get different registrations such as VAT, excise and service tax, etc.
5. Less compliance burden
Before GST introduction, the compliance frequency of tax filing returns was as under –
|Service tax|| Firms – Quarterly
Co’s – Monthly
|VAT|| Different in different states
Under GST, there is only one unified return to be filed. There are about 11 returns in the GST system, out of which 4 are basic returns which apply to all taxable persons under GST. The main GSTR-1 is manually populated and GSTR-2 and GSTR-3 are auto-populated.
6. Defined treatment for e-commerce operators
Earlier, supplying goods through e-commerce platforms was not defined due to variable VAT laws. For example One live website like Flip kart or Amazon declaration maintaining the registration number of the delivery vehicle. Tax authorities sometimes seize the goods if documents were not produced. Further, these e-commerce brands were treated as facilitators or mediators by states like Kerala, Rajasthan, and west-Bengal which did not require them for registration for VAT. The GST system has clearly mapped out the provisions applicable to e-commerce sector uniformly all over India. Therefore there is no differential treatment or confusing compliance regarding the interstate movement of goods.
7. Efficient logistics
Earlier, the logistics industry in India had to maintain multiple warehouses across states to avoid CST and state entry taxes on their interstate movement. This caused a significant rise in operational cost. As an outcome of GST, warehouse agencies and e-commerce aggregators have started setting up their warehouses at a strategic location such as Nagpur (the zero mile city of India), instead of every other city on their delivery route. This reduction of operating cost boosts the profitability of businesses involved in the supply of goods through transportation.
8. Regulation of the unorganized sector
In the pre-GST era, the industrial sectors like textile and construction were often unregulated and unorganized
Under GST, there are provisions for online compliance, payments and availing the input credit only when the supplier has accepted the amount. This has brought in accountability and regulation of these industries.
There are a few apprehensions seen as the disadvantages of GST. However such drawbacks are likely to be overcome by certain provisions, modification, and exemptions in GST system. These are listed as under.
- Additional cost of GST software: – Under GST, the business have to update their existing accounting or making their ERP software GST compliant, besides training their employees for effective and efficient utilization of GST billing system. Such additional cost may be taken as a disadvantage by some business persons.
- Need for GST Compliant: – Small and medium enterprises will have to issue GST compliant invoices, record keeping and digitally file their returns containing mandatory details like GSTIN, place of supply, HSN codes, etc.
- Increased operational cast: – The operational cost of the business may increase due to the training of employees, cost of hardware and software and hiring professional services of GST familiar experts. These costs have to be a part of the operational cost of the business.
- Implementation in the mid-financial year: – As GST was implemented from 1st July 2017, businesses followed the old tax structure for the fist three months of the financial year and GST for the rest of the period. Therefore it might have hard for them to adjust to the new tax regime of GST some of them may be running both the system in parallel which could have been confusing.
- Online taxation system: – On time return filing and payment system may be a tough task for small businesses in term of initial adaptation. However, there are cloud-based GST billing software like “clean tax” where the business persons have to upload their invoices and the software will populate returns automatically with the information’s from the invoices. Any errors in invoices will be clearly identified by the software in real-time thus increasing the efficiency & timeliness.
- SME will have high tax burden: – Earlier only business whose turnover exceeded Rs. 20 lacs will have to pay GST. However SME with a turnover Rs. 20 lacs will have to pay GST. However SME with a turnover up to Rs. 75 lac can opt for composition scheme and pay only 1% turnover tax in lieu of GST.
Businesses opting for composition scheme are not eligible for claiming input tax credits (ITC). The decision to choose between higher taxes or the composition scheme (with no ITC) will be a tough one for many SME’s
Change is certainly a never easy process. Sometimes it may be painful. But the initial pain also promises the future advantages of aligning ourselves with global economies that have introduced GST before us, and have overcome the problems and now enjoying the benefits of Input Tax Credit.