Advantages and Disadvantages of GST

The Goods and Services Tax (GST) was introduced in India on July 1, 2017, as a major tax reform aimed at simplifying the complex tax structure that existed before. It replaced multiple indirect taxes like excise duty, service tax, and VAT, unifying them into a single tax that applies to the supply of goods and services across the country. The aim was to streamline the tax system, promote ease of doing business, and encourage economic growth.

However, as with any significant reform, the implementation of GST has had both positive and negative implications for businesses and consumers. This article discusses the GST benefits and disadvantages in India, examining it’s impact on the economy and various sectors.

Understanding GST in India

GST is a value-added tax levied on the sale of goods and services. It has a three-tier structure comprising the Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST), and Integrated Goods and Services Tax (IGST). The primary objective of GST is to eliminate the cascading tax effect, where goods were taxed multiple times in the supply chain. With its implementation, businesses no longer need to deal with various taxes imposed by both the central and state governments. This simplification was expected to create a unified national market, reduce tax evasion, and make tax compliance easier.

The tax rate for GST is divided into multiple slabs, ranging from 0% to 28%, with different rates applied to various goods and services. The GST Council, which includes both central and state government representatives, is responsible for setting the rates and resolving disputes related to the implementation of GST.

Advantages of GST

Below is an overview of the benefits of GST:

Simplification of Tax Structure:

One of the biggest advantages of GST is its simplification of the tax structure. Previously, businesses had to file separate returns for different taxes, which often led to confusion and a higher administrative burden. GST consolidated these taxes into a single system, reducing the cascading effect.

Boost to Economic Growth:

GST has played a crucial role in promoting economic growth. By creating a unified tax structure, it has removed many barriers to trade between states. Previously, businesses had to deal with state-specific taxes like entry tax and octroi, which increased the cost of goods and created logistical challenges. With GST, businesses can now move goods freely across state borders.

Enhanced Transparency and Compliance:

GST has brought transparency to the tax system. The tax filing process is now digital and automated, reducing human error and making it easier to track transactions. Businesses are required to upload invoices and file returns online, which ensures that every transaction is recorded and can be traced back to the source. 

Reduction in Cost of Production:

Another key benefit of GST is the availability of Input Tax Credit (ITC). Under the previous system, businesses could not claim credit for taxes paid on raw materials and inputs, leading to higher costs. However, with GST, businesses can now claim credit for taxes paid on inputs used in the production of goods and services, which reduces the overall cost of production.

Benefits to Consumers:

GST has had a generally positive impact on consumers by reducing the tax burden on many goods and services. For example, goods like electronic items, cars, and certain household products saw a reduction in tax rates under GST. 

Disadvantages of GST

Despite its advantages, GST has also had some disadvantages. Some drawbacks of GST implementation include:

Impact on Small Businesses:

Small businesses, which constitute a significant portion of India's economy, have faced some challenges with GST. The compliance costs are higher for smaller firms, as they need to either invest in new software or hire accountants to manage the new system. Additionally, businesses with lower turnover might not benefit fully from the ITC system, which is more advantageous for larger businesses with higher input costs.

Complexity of Tax Filing for Multiple States:

GST requires businesses to file returns in each state where they operate, which can lead to complexity and confusion for companies with operations in multiple regions. Although the system was designed to simplify tax compliance, the need to adhere to state-specific rules and file returns separately for CGST, SGST, and IGST can still be burdensome for businesses, especially those without a dedicated team to manage these tasks.

Technological Challenges and GSTN Issues:

The technology platform for GST, known as the Goods and Services Tax Network (GSTN), has faced several technical glitches since its launch. These issues include server downtimes, errors in processing returns, and delays in uploading invoices, which have caused significant disruptions for businesses and taxpayers. 

Impact of GST on Different Sectors

Manufacturing and Goods: 

Large-scale manufacturers have generally benefited from GST, as it has reduced tax-related complexities and provided better access to ITC. However, MSMEs (Micro, Small, and Medium Enterprises) have faced difficulties in meeting compliance requirements, as they often lack the resources to navigate the updated system effectively. However, the government has introduced some relief measures (like the composition scheme) to alleviate this burden for small businesses.

Services Sector: 

Some sectors, like hospitality and restaurants, faced increased costs due to higher tax rates. This led to price increases and potentially lower consumer demand. Sectors like consulting and IT services, which often had higher input costs, saw a reduction in the overall tax burden due to ITC benefits.

Agriculture and Rural Economy: 

The agricultural sector has experienced mixed results. While GST benefits agricultural businesses in terms of ITC, the lack of clarity in the taxation of farm products and input goods has created challenges for farmers.

E-Commerce and Digital Economy: 

GST has facilitated growth in the e-commerce sector by creating a standard tax system, but compliance remains a challenge for small e-commerce businesses. These businesses often struggle with complex tax reporting requirements and the need to manage transactions across multiple states.

Conclusion

While GST has both advantages and disadvantages, it has significantly simplified India's tax structure, created a more unified market, and enhanced business efficiency. For businesses looking to optimise these benefits and expand, access to additional capital is often necessary. An unsecured business loan of up to INR 75 lakhs* from SMFG India Credit can help meet your enterprise’s financial needs, ensuring smooth cash flow and fueling business growth. Apply online today or contact us for more details.