Advantages and Disadvantages of GST

Advantages and Disadvantages of GST

As one of the biggest tax reforms in the country, the Goods and Services Tax (GST) accepts several indirect taxes that were levied by the Center and the state such as excise, VAT and service tax. It is levied on both goods and services sold in the country.

Any improvement is bound to have advantages and disadvantages. In this article, we will talk about both the advantages and disadvantages of GST:

Advantages of GST

GST eliminates cascading effect of tax

GST is a comprehensive indirect tax that was designed to bring indirect taxation under one umbrella. More importantly, it is going to eliminate the effects of the tax that was previously evident.

The cascading tax effect can best be described as 'tax on tax'. Let us understand this example of what is tax on tax:

Before GST regime

A consultant offering services for say, Rs 50,000 and charged a service tax of 15%
(Rs 50,000 * 15% = Rs 7,500).

Then say, he would buy office supplies for Rs. 20,000 paying 5% as VAT
(Rs 20,000 *5% = Rs 1,000).

He had to pay Rs 7,500 output service tax without getting any deduction of Rs 1,000 VAT already paid on stationery.

His total outflow is Rs 8,500.

Under GST 

GST on service of Rs 50,000 @18%

9,000

Less: GST on office supplies (Rs 20,000*5%)

1,000

Net GST to pay

8,000

Higher threshold for registration

Earlier, in the VAT structure, any business with a turnover of Rs 5 lakh (in most states) was liable to pay VAT. Please note that this limit differs state-wise. Also, service tax was exempted for service providers with a turnover of less than Rs 10 lakh.

Under the GST regime, however, this limit has been increased to Rs 20 lakh, exempting many small merchants and service providers.

Let us see this table below:

Tax

Threshold Limits

Excise

1.5 crores

VAT

5 lakhs in most states

Service Tax

10 lakhs

GST

20 lakhs (10 lakhs for NE states)

Composition scheme for small businesses

Under GST, small businesses (with a turnover of 20 to 75 lakh rupees) can benefit as it gives a choice of lower taxes using the structure scheme. The move has reduced the tax and compliance burden on many small businesses.

Simple and easy online process

The entire process of GST (from registration to filing of returns) has gone online, and is super simple. This has been particularly beneficial for start-ups, as they do not need to run from column to post to obtain various registrations such as VAT, excise and service tax.

Compliance count is low

Earlier, there was VAT and service tax, each of which had its own returns and compliance. The table below shows:

Tax

Return Filing

Excise

Monthly

Service Tax

Proprietorship / Partnership – Quarterly
Company / LLP – Monthly

VAT

* Different for different states *
Some states require monthly returns over a threshold limit.
Some states like Karnataka require a Monthly return

Under GST, however, only one, integrated return has to be filed. Therefore, the number of returns to be filed has decreased. There are about 11 returns under GST, out of which 4 are basic returns which are applicable to all taxable persons under GST. The main GSTR-1 is manned manually and GSTR-2 and GSTR-3 will be auto-populated.

Prescribed treatment for e-commerce operators

In the earlier GST regime, the supply of goods through the e-commerce sector was not defined. It had variable VAT laws. Let us look at this example:

Online websites (such as Flipkart and Amazon) announced VAT for delivery in Uttar Pradesh and mentioned the registration number of the delivery truck. If the documents were not produced, the tax authorities may sometimes confiscate the goods.

Then, these e-commerce brands were considered as facilitators or intermediaries by states such as Kerala, Rajasthan, and West Bengal, which did not require them to register for VAT.

All these differential treatments and misleading compliance have been removed under the GST. For the first time, the GST has clearly removed the provisions applicable to the e-commerce sector and since these are applicable across India, there should be no complication regarding the inter-state movement of goods.

Better Logistics Efficiency

Earlier, the logistic industry in India had to maintain several warehouses across the states to avoid the current CST and state entry taxes on the interstate movement. These warehouses were forced to run below their operational capacity, which increased operating costs.

Under the GST, however, these restrictions on inter-state movement of goods have been relaxed.

As a result of GST, warehouse operators and e-commerce aggregators players have shown interest in setting up their warehouses at strategic locations like Nagpur (which is a zero mile city of India) rather than every other city on their delivery route.

Reduction in unnecessary logistics costs is already increasing profits for businesses involved in the supply of goods through transportation.

Unorganized sector is regulated under GST

In the pre-GST era, it was often seen that some industries in India such as construction and textiles were largely unregulated and unorganized.

Under GST, however, there are provisions for online compliance and payment, and only to avail input credit when the supplier has accepted the amount. This has brought accountability and regulation towards these industries.

Let us now look at the disadvantages of GST. Please note that businesses need to overcome these disadvantages in order to run the business smoothly.

Disadvantages of GST

Failure to be GST-compliant may attract penalties

Small and medium-sized enterprises (SMEs) may still not be able to understand the specifics of the GST tax regime. They have to issue GST-complaint invoices, comply with digital record keeping, and of course, file returns on time. This means that the GST-complaint challan issued should contain mandatory details such as GSTIN, place of supply, HSN code and others.

GST will mean an increase in operating costs

As we have already established how GST is paying tax, businesses will now have to appoint tax professionals to be GST-compliant. This will gradually increase costs for small businesses as they will have to bear the additional cost of hiring specialists.

In addition, businesses will need to train their employees in GST compliance, thereby increasing their overhead expenses.

GST came into force in the middle of the financial year

After GST came into force on 1 July 2017, businesses followed the old tax framework for the first 3 months (April, May and June), and GST for the rest of the financial year.

Businessmen may find it difficult to adjust to the new tax regime, and some of them are running these tax systems in parallel, resulting in confusion and compliance issues.

Adopt a complete online taxation system

Unlike before, businesses are now switching from pen and paper invoices and filing for online return filing and payment. This can be difficult for some small businesses to adapt to.

SMEs will have higher tax burden

Small businesses, especially the manufacturing sector, will face difficulties under GST. Earlier, only businesses whose turnover was more than Rs 1.5 crore had to pay excise duty. But now any business whose turnover is more than Rs 20 lakh will have to pay GST.

However, SMEs with turnover up to Rs 75 lakh can opt for composition scheme and pay only 1% tax on turnover in lieu of GST and enjoy less compliance. Although this business belongs to these businesses, they will not be able to claim any input tax credit. The decision to choose between higher taxes or composition schemes (and thus not ITC) will be difficult for many SMEs.

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Finance Bazaar

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