GST was first regulated on 1st July 2017 and the mandatory tax has been revised a couple of times. In this blog, we will be discussing on what are the advantages and disadvantages of GST on people and business owners. Let’s kick in
What is GST?
GST or the Goods and Services Tax is a replacement for the multiple indirect taxes that used to be levied on products and services, such as Excise duty, VAT, Cess, Central Sales Tax, Service Tax, and more. The GST bill was passed on 29th March 2017 and implemented from 1st July 2017. This tax is levied at each stage of value addition along the supply chain, from product manufacturing to the sale to the consumer.
How Does GST Work?
GST was put into effect to eliminate unnecessary and multiple indirect taxes that often came to be a burden on every taxpayer due to their high costs. Thus, instead of paying tax on tax, taxpayers only need to pay a unified, centralized, and comprehensive tax charged on the value added at the manufacturing, sale, and consumption stages of goods and services. The central concept of Goods and Services Tax (GST) is to follow and adopt the One Nation, One Tax principle.
What are the Different Components of GST?
Goods and Services Tax comprises three major components:
| Types of taxes | Nature of jurisdiction |
| Central Goods and Services Tax or (CGST) | Tax charged by the central government on business undertaken within a state |
| State Goods and Services Tax or (SGST) | Tax charged by the state government on business undertaken within a state |
| Integrated Goods and Services Tax or (IGST) | Tax charged by the central government on business undertaken between two states |
How Does GST Differ from the Pre-GST Tax Regime?
Before the GST implementation, the state and the centre charged indirect taxes on goods and services as VAT(Value Added Tax) and CST(Central State Tax), each having its own set of rules and regulations. Few taxes, such as local and entertainment taxes, were levied by the state and centre levels together, leading to a tax-on-tax effect. GST removes the cascading effect of taxes by replacing them with a single tax, based on value addition, at every stage, reducing indirect tax costs to a large extent.
Advantages of GST
The advent of GST has signalled numerous beneficial changes to the Indian economy. A few of the many advantages of GST include:
Elimination of the cascading effect
Let’s think of a manufacturer who buys flour, sugar, and other ingredients and bakes them into cookies. They then sell them to an agent, who labels them. The cookies are sold to a retailer, who, in turn, sells them to customers. In an indirect-tax regime, tax charges are added on top of each other, the liability resting with the customer and leading to the cascading effect. On the other hand, GST is levied at each stage with value addition, and the taxpayer can even claim a tax credit for an already paid tax while filing for a return, thus reducing tax liability.
GST Composition Scheme for Small Business
Within the GST framework, small enterprises (with an annual turnover ranging from Rs.20 to 75 lakh) have the opportunity to gain advantages through the Composition scheme, allowing them to potentially reduce taxes. This initiative has effectively reduced the tax liabilities and regulatory obligations for numerous small-scale enterprises.
Ease of Business Operation
GST has allowed and encouraged more businesses to operate in a hassle-free manner in India. All they have to do is register their business under the programme, submit the necessary documents, and fill out the application forms. Business owners are now eligible for GST-based business loans up to 50 lakhs based on the statement.
Easy To Apply
All the steps, from registering the business under GST, submitting records, and filing returns are carried out in the online GST portal. This reduces the hassle of visiting offices and registering for multiple taxes like VAT, excise duty, etc.
Minimizes Tax Evasion
The GST registration procedure makes detecting fraudsters who submit duplicate invoices to claim tax credits convenient. Its stringent procedure and system help reduce tax evasion financial crimes to a considerable extent.
Increases Consumption
With GST removing numerous intermediary taxes, the payable tax decreases, and the final value of the goods and services also reduces. This results in the increased consumption of items and a growth in revenue.
Privileges for e-commerce operators
Prior to the implementation of GST, the e-commerce sector operated under varying VAT laws without specific regulations. Take, for instance:
In Uttar Pradesh, online platforms such as Flipkart and Amazon had to submit a VAT declaration and specify the delivery truck’s registration number. Failure to produce these documents could result in tax authorities seizing the goods.
Conversely, states like Kerala, Rajasthan, and West Bengal regarded these e-commerce platforms merely as intermediaries, exempting them from VAT registration.
The introduction of GST has standardized regulations for the e-commerce sector nationwide, eliminating the disparities and complexities of compliance. With uniform provisions applicable across India, the movement of goods between states should now be streamlined, alleviating any prior complications.
Disadvantages of GST?
Some of the prominent disadvantages of GST include:
Strict GST Regime
The inflexible GST regime allows for the generation of e-way bills only after filing a GST return. Furthermore, not paying GST or filing a GST return can result in penalties, underlining the stringent policies of GST.
High Operational Costs
Companies have to purchase and install additional software compliant with the online GST portal and procedure for smooth operation. Businesses might have to hire professionals and experts to adjust and become GST-compliant, further increasing the costs.
Tax Burden for SMEs
Small and Medium Enterprises or SMEs with a turnover of 75 lakh can avail of the composition scheme and pay only 1% tax for lower compliances with no input tax credit. Otherwise, they can pay a higher amount as taxes and claim input tax credit while filing the return.
Drastic Change
For most businesses, getting accustomed to an advanced and fully online tax-paying system can take time and effort. Companies that function in remote areas might find it troublesome to enroll under GST, make payments, and file returns through online procedures.
Effect on Real Estate Sector and Increased Costs
The Goods and Services Tax can drastically affect the real estate market by reducing demand by up to 12% and increasing the cost by 8%. There are chances for facilities like insurance premiums and items like clothes to become more expensive with the introduction of GST.
Conclusion
GST, or Goods and Services Tax, replaces indirect taxes like excise, service tax, and VAT, eliminates the cascading effect of taxes and reduces tax liability. While removing the tax-on-tax effect, reducing tax evasion, increasing consumption, and making business operation and registration easier are the advantages of GST; a rigid tax regime, tax burden on SMEs, and high operational costs are a few disadvantages.
FAQs
What is Tax Collected at Source?
Under Tax collected at source, buyers engaging in exceptional transactions must pay a designated tax percentage. These transactions predominantly pertain to commerce or business dealings, with ordinary citizens being exempt from such taxation.
What are the common disadvantages of GST?
Here are few common disadvantages of GST
- Increase Cost
- Increase burden for MSMEs
- Difficult to migrate on online filing system
- Increase software expense
What are the common Advantages of GST?
- One Tax System
- Increase in Foreign investment
- Simple Access
- Efficiency in logistics
- Boosting Revenues