Exploring the Pros and Cons of India's Goods and Services Tax

The Goods and Services Tax (GST) represents a significant tax reform in India, profoundly impacting transactions for individuals and businesses. This comprehensive indirect tax consolidates various central and state levies, such as excise duty, VAT, and service tax, applying to both goods and services sold nationwide. Like any major systemic change, GST comes with distinct advantages and disadvantages. This article explores the key benefits and drawbacks of the GST system, illustrating them with practical examples.

Benefits of the Goods and Services Tax

1. Eliminating the Tax-on-Tax Effect

GST was designed as an all-encompassing indirect tax to unify the taxation structure and, critically, to remove the cascading effect of taxes.

This 'tax on tax' scenario, where tax was levied on an already taxed value, was a significant issue in the previous regime.

Let's examine an example to clarify this:

Before GST Implementation

A consultant provided services valued at Rs.50,000, incurring a 15% service tax (Rs.7,500).

Separately, the consultant purchased office supplies for Rs.20,000, paying 5% VAT (Rs.1,000).

Under the old system, the consultant was required to pay the full Rs.7,500 output service tax without any deduction for the Rs.1,000 VAT already paid on stationery.

Total tax outflow for the consultant amounted to Rs.8,500.

Under the GST Regime

2. Increased Threshold for Taxpayer Registration

Previously, under the VAT system, businesses with a turnover exceeding Rs.5 lakh in most states were mandated to register and pay VAT, with thresholds varying by state.

Service providers also enjoyed an exemption from service tax if their turnover was below Rs.10 lakh.

However, with the introduction of GST, the GST registration threshold has been raised significantly to Rs.20 lakh (and Rs.40 lakh for businesses dealing exclusively in goods).

This change offers relief to many small traders and service providers by exempting them from GST registration.

Here’s a comparative look at the thresholds:

3. Composition Scheme Option for Smaller Enterprises

GST introduces a beneficial Composition scheme for small businesses with an annual turnover ranging from Rs.20 lakh to Rs.1.5 crore.

This scheme allows them to pay taxes at a lower, fixed rate, thereby reducing both their tax liability and compliance burden.

4. Simplified Online Compliance Procedures

The entire GST process, from GST registration to filing returns, is now conducted online and is designed for simplicity.

This digital approach is particularly advantageous for startups, as it eliminates the need to navigate multiple government offices for various registrations like VAT, excise, and service tax.

5. Reduced Compliance Requirements

Prior to GST, businesses faced separate return filing and compliance obligations for VAT and service tax.

The table below illustrates the former complexity:

Under GST, the number of returns required has decreased.

Out of approximately 11 GST returns, four are standard and applicable to most regular taxable individuals.

The GSTR-1 is used to report sales invoices for a tax period.

The dynamic GSTR-2A and static GSTR-2B are auto-drafted returns that provide input tax credit details.

The summary return, GSTR-3B, encompasses sales and ITC data, refund information, and details of non-GST supplies, used to declare taxes payable, ITC claimed, and taxes paid.

6. Specific Provisions for E-commerce Operations

Before GST, the e-commerce sector lacked clear, uniform regulations, operating under diverse and often confusing VAT laws.

For instance, online platforms delivering goods to Uttar Pradesh were required to file VAT declarations and specify truck registration numbers, with potential seizure of goods if documentation was insufficient.

Conversely, states like Kerala, Rajasthan, and West Bengal categorized e-commerce brands as facilitators, exempting them from VAT registration requirements.

GST has resolved these disparate treatments and compliance ambiguities.

For the first time, a common set of provisions for the e-commerce sector has been established across India.

This uniformity aims to eliminate complications related to the inter-state movement of goods.

For a more detailed analysis, read about the impact of GST on e-commerce.

7. Enhanced Logistics Sector Efficiency

Previously, India's logistics industry had to maintain multiple warehouses in different states to circumvent Central Sales Tax and state entry taxes on inter-state goods movement.

This often led to underutilized warehouses and inflated operating costs.

GST has significantly eased these restrictions on the inter-state flow of goods.

Consequently, warehouse operators and e-commerce aggregators are now prioritizing strategic locations, such as Nagpur (known as India's zero-mile city), rather than setting up facilities in every delivery city.

This reduction in unnecessary logistics costs is already contributing to increased profitability for businesses involved in goods transportation.

To learn more, read about the impact of GST on logistics.

8. Regulation of the Unorganized Sector

In the era preceding GST, several Indian industries, including construction and textiles, were largely informal and unregulated.

Under GST, however, online compliances and payment mechanisms, coupled with the provision for input credit only upon supplier acceptance, have introduced greater accountability and regulation into these sectors.

Now, let's turn our attention to the challenges associated with GST.

Challenges and Disadvantages of GST

Businesses must actively address these disadvantages to maintain smooth operations.

1. Rising Costs Associated with Software Acquisition

Businesses are required to continuously monitor GST updates.

They must ensure their accounting or ERP software is updated in real-time to reflect the latest GST legal and portal changes.

Alternatively, they can invest in a GST compliance solution.

Both options necessitate financial investment and time commitment for employee training to effectively utilize new GST software.

2. Risk of Penalties for Non-Compliance

Many small businesses in India are progressively adapting to monthly GST changes.

When the law was initially launched, they had to learn how to issue GST-compliant invoices, maintain digital records, and file returns promptly.

A GST-compliant invoice requires specific mandatory details such as GSTIN, place of supply, HSN codes, among others.

3. Increase in Business Operational Expenses

GST fundamentally altered tax payment and return filing processes.

Businesses often needed to hire tax professionals with specialized expertise to ensure GST compliance, which incrementally raised costs for small businesses.

Additionally, training employees on GST compliance further increased overhead expenses.

4. Mid-Financial Year Implementation Challenges

Given that GST was implemented on July 1, 2017, businesses operated under the previous tax structure for the initial three months (April, May, June) of the financial year 2017-18, and then transitioned to GST for the remainder.

Many businesses found this mid-year adjustment difficult, with some attempting to run both tax systems concurrently, leading to confusion and compliance issues.

5. Transition to a Fully Digital Taxation Framework

Unlike the past, businesses were compelled to move from manual invoicing and paper-based filing to entirely online return submission and payment.

This shift posed a significant challenge for some smaller businesses to adapt to.

6. Increased Tax Burden for Small and Medium Enterprises

Small and Medium Enterprises (SMEs), particularly in the manufacturing sector, have encountered difficulties under GST.

Previously, excise duty was only applicable to businesses with a turnover exceeding Rs.1.5 crore.

Now, any business with a turnover above Rs.20 lakh is required to pay GST.

However, SMEs with a turnover up to Rs.1.5 crore can opt for the composition scheme, paying only 1% tax on turnover instead of regular GST and benefiting from fewer compliances.

The trade-off is that these businesses cannot claim any input tax credit.

The decision between higher standard taxes or the composition scheme (and foregoing ITC) remains a complex choice for many SMEs.

Conclusion

Embracing change is inherently challenging.

The government continues its efforts to streamline the GST implementation.

It is crucial to draw lessons from other global economies that adopted GST earlier, navigating initial difficulties to eventually reap the rewards of a unified tax system and straightforward input credits.

GST is continuously evolving, incorporating advanced analytics through AI and ML to mitigate revenue leakages and facilitate the auto-population of returns with validated data, thereby reducing source errors.

The ultimate goal for businesses remains consistent GST compliance at all times.

Explore our articles and GST tutorial videos for further insights.