The Goods and Service Tax (GST) is said to be the greatest tax reorganization of India. It incorporates several indirect taxes that were put by the Centre and State, for example, VAT, excise, and service tax. The GST is imposed on all the services and goods found in the nation.
July 1st is celebrated as the GST Day each year. As GST is a kind of reform, it is known that each reform has its advantages and disadvantages.
So, the advantages and disadvantages of GST are described below:
Advantages Of GST
1. Cascading tax effect is eliminated
The term GST is the abbreviation for Goods and Services Tax. The main purpose of its development was to gather indirect taxes in one place. With its help, the negative effect of the tax will get eliminated.
The ‘Tax on Tax’ impact is the best way to define the cascading tax effect. To further grasp what Tax on Tax is, consider the following example:
Before the GST reform:
A consultant charging Rs 60,000 for consultations and charging a service tax of 20% (Rs 60,000 * 20% = Rs 12,000).
Then, let’s assume he spends Rs 30,000 on office equipment and pays 6% VAT (Rs 30,000 * 6% = Rs 1,800).
He had to give Rs 12,000 in output service tax, even though he’d already given Rs 1,800 in VAT on equipment.
His outflow totals Rs 13,800.
After the GST reform:
GST applied on service of Rs 60,000 @22% 13,200
Less: GST on office equipment (Rs 30,000*6%) 1,800
Net GST to pay: 11,400
2. A good registration level
Previously, any company with a revenue of over Rs 5 lakh (in most regions) was ordered to contribute VAT. Please keep in mind that this restriction varied per state. In addition, service providers had revenue of only about Rs 10 lakh are free from paying service tax.
This ceiling has been raised to Rs 20 lakh under the GST system, which excludes many small retailers and service givers.
Let us look at the table below:
|GST||20 lakhs (10 lakhs for NE states)|
|Service Tax||10 lakhs|
|VAT||5 lakhs in most states|
3. Composition plan for small enterprises
Small firms (with a revenue of Rs 20 to 75 lakh) can profit from GST because it allows them to use the Composition plan to cut their taxes. Because of the application of GST, various companies have gotten a reduced response on their regulatory burdens and taxes.
4. Straightforward and quick online process
The whole GST procedure (from application through filing returns) is done electronically, and it is straightforward. This has benefited start-ups in particular because they no longer have to go from place to place to obtain various licenses, such as service tax, VAT, and excise.
5. E-commerce businesses have specific handling
Providing commodities via the e-commerce industry was not explained before the GST system. It has a wide range of VAT laws.
Consider the following scenario:
Deliveries to Uttar Pradesh required online retailers (such as, Flipkart and Amazon) to submit a VAT statement and provide the transport truck’s registration details. If the documentation isn’t presented, tax authorities may be able to take the items.
Likewise, the states such as Rajasthan, Kerala, and West Bengal took these e-commerce firms as facilitators and didn’t need any VAT applications.
With GST, all of these disparities in classification and perplexing regulations have been eliminated. During the first period, GST explicitly sketched out the regulations that apply to the online commerce industry. So, as these guidelines are valid throughout the nation, the transport of goods through the states should become easy.
6. Transportation efficiency has improved
To evade the existing CST and state entrance tariffs on inter-state transportation, India’s logistics business had to operate various warehouses across regions. These facilities were compelled to function at a reduced capacity, resulting in higher operational expenses.
Nevertheless, with the GST, such limits on state-wide transportation of products have been reduced.
As a result of the GST, logistics providers, and online commerce conglomerates have expressed interest in locating their facilities in strategic areas, including Nagpur (India’s zero-mile city), rather than in every other city along their transport route.
Companies related to the shipping of commodities are already seeing an increase in earnings as superfluous logistics expenditures are reduced.
7. GST governs the unorganized sector
Several companies in India, such as building and textiles, were primarily uncontrolled and disorganized before the GST.
Still, via GST you can get special facilities for e-transactions and conformity, plus the power to receive input credit.
Take into account the fact that there won’t be any more tax evasion under the proposed GST than there was under the existing tax laws. A more straightforward tax structure will motivate more vendors to contribute the required tax, raising revenue volumes.
All communication takes place through a single GSTN interface. Hence, the numerous activities including returns, tax payments, registrations, etc., are automated and made simpler.
Read more: Types of GST registration in India
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Disadvantages Of GST
Let’s take a glance at the GST’s drawbacks. Please keep in mind that to run a successful business, companies must overcome these obstacles.
1. Expenses have risen as a result of the software upgrades
Businesses must either upgrade their present accountancy or ERP systems to be GST-compliant or purchase GST software to continue operating. However, both approaches increase the expense of purchasing systems and training personnel to use the new billing technology efficiently. It has alleviated people’s suffering in a variety of ways.
2. Noncompliance with the GST can result in penalties
Medium and small businesses (SMEs) may still struggle to understand the complexities of the GST tax system. They’ll have to send out GST-compliant invoices, preserve digital records, and, obviously, file returns on time. This implies that the GST-compliant invoice must include mandatory information like the GSTIN, the location of delivery, and HSN codes, among other things.
3. Operational prices will rise as a result of the GST
Because the GST is altering the way taxes are paid, companies will now need to hire tax management that can be GST-compliant. Small firms will progressively see their costs rise as a result of the higher expense of employing specialists.
Businesses would also have to teach their personnel on GST compliance, which will add to their operating expenses.
The GST was implemented during the fiscal year. Companies used the old taxation system for the 1st three months (April, May, and June) when GST was adopted on July 1, 2017, and GST for the complete financial year.
Companies may struggle to conform to the new tax system, and some are operating two tax systems at the same time, causing complexity and regulatory concerns.
4. Getting used to a full-fledged online taxes system
Companies are currently transitioning from paper-pen billing and reporting to online filing returns and reimbursement, unlike in the past. Some smaller enterprises may find it difficult to adjust.
GST billing system which is cloud-based is unquestionably a remedy to this issue. The GST return submission process is fairly straightforward. All that is required of company owners is to submit their bills, and the program will automatically generate the return forms with the data from the receipts. Any invoice problems will be recognized in live time by the program, boosting efficiency and punctuality.
5. SMEs will have a higher tax burden
The businesses that are still budding, can face a tough time because of GST. In the before-GST period, the businesses with yearly revenue of Rs. 1.5Cr had to pay the GST. But after the GST period any company with annual revenue of Rs. 20L has to pay GST.
Nevertheless, there is a separate composition scheme for SMEs that have a turnover of Rs. 75L. In this scheme, they only have to pay 1% tax in replacement of GST. But, what’s the catch here? So, the catch is that these companies can then become unable to lay their hands on any input tax credit. The SMEs have to choose between the composition scheme and the high taxes, so it’s definitely not an easy decision to make.
The introduction of GST has been a big change for India’s economical sector. And we know that change is not easy. Our government is trying its best to pave paths for a better future for GST. Because the key to the nation’s economic growth is being compliant with GST, everyone must understand that implication of GST has been important. But it also has its own set of disadvantages. This article will help you in getting an idea about both of them.
The Goods and Services Tax (GST) is a tax that applies to both products and services. GST would replace the existing taxes such as CENVAT, Octroi, Sales Tax, and Excise Duty with a single destination-dependent consumption tax.
The most important advantage of GST to the customer at the end is the reduction in the percentage of taxation. When it comes to the indirect tax regime, under this, the customer might end up giving more than the actual price of the services or goods. The council of GST has set the rates in 4 levels of 12%, 5%, 28%, and 18.
- The cost of software upgrades has increased.
- Penalties may apply for failing to comply with the GST.
- The increasing tax burden on SMEs.
- Conversion to an electronic filing system might be challenging.
SGST, CGST, IGST, and UTGST are the different forms of GST in India.
- SGST: The sale of products and services inside a state is subject to SGST by a State government.
- CGST: CGST is a tax that the federal government imposes on intrastate sales of products and services.
- IGST: An IGST is assessed when a trade involving products or services is of an interstate kind.
- UTGST: UTGST is applicable inside one Union Territory only.
The Goods and Services Tax (GST) has done a good job of introducing taxation system consistency. It has aided in the simplification of tax administration and significantly enhanced returns growth. There is, however, still a long way to go. When more companies register for GST, the taxing system will operate even more smoothly.
Reshma Ali has great expertise in mergers & acquisitions, Financial planning, and international company formation and offers advice and knowledge to help businesses achieve their objectives.