Goods and Services Tax, popularly called GST, was introduced on July 1, 2017, as a replacement for multiple indirect taxes, including VAT, service tax, and excise duty. It’s considered one of the biggest tax reforms by the Indian government in the direction of lowering the tax burden, improving transparency, and streamlining the entire process for taxpayers of the country.
The debate is still going on whether implementing the new tax regime was the right decision or not. As a taxpayer and entrepreneur, it’s essential to know both advantages and disadvantages of GST in India before coming out with any decision.
The term “GST” was first used during a budget speech on February 28, 2006. It was proposed to rebuild India’s taxation system to make it more transparent and convenient.
The GST Act was presented in Parliament on March 27, 2017, and came into action on July 1, 2017. The GST outlawed the old indirect taxes like VAT, excise duty, and service tax.
However, there are still a few goods and services, like natural gas and fuels, where the old tax regime is applicable. According to sources, the Government of India may introduce GST on diesel, petrol, and other products and services which are currently not included in this new tax regime.
Also Read: 5 Best Books on GST in India
Advantages of GST
1. One Tax System
GST was implemented primarily to remove the various indirect taxes businesses were required to pay to comply with taxation laws. Before GST, a series of indirect taxes were applicable, like excise duty and VAT. But now, all those taxes are removed from most products and services in India. There are different tax slabs for different products and services. The tax slabs range from 0% to 5%, 12%, 18%, and 28%.
2. No Cascading Effect
Removal of cascading effect, tax on tax, on the computation of indirect tax is another advantage of GST. Let’s understand the cascading effect of previous and current indirect tax regimes.
Condition 1: When the old tax regime is applicable
Firm A delivers its transportation service at Rs 50,000 and levies a service tax of 15%, which is Rs 7,500. The company also purchases office furniture at Rs 30,000. It pays a value-added tax of Rs 1500 (@5% of the purchase amount) without claiming any deduction. In this scenario, firm A pays a total tax of Rs 9,000 (Rs 7,500 + Rs 1,500).
Condition 2: When New Tax Regime is Applicable
In this situation, the indirect tax liability of firm A would be only Rs 6,000 because the firm has the option to avail of an applicable deduction, which is Rs 1,500 in this case.
3. Increased Threshold Limit
Small and medium enterprises with a turnover of up to Rs 20 lakh are exempt under GST. Earlier, companies with a turnover of Rs 20 lakhs to Rs 75 lakhs were required to pay various taxes, increasing the tax burden and limiting growth. Below is a brief information about the threshold limit of all these taxes.
|VAT||₹5 Lakhs (In most cases)|
|Service Tax||₹10 Lakhs|
|Excise Duty||₹1.5 Crores per annum|
|GST||₹20 Lakhs (₹10 Lakhs in case of North Eastern states)|
4. Limited Compliances
Under Goods and Services Tax, all kinds of taxes are paid in a single form. It’s different from the previous tax regimes, where companies must pay service and value-added taxes separately. For example, companies were required to pay excise duty every month; the service tax for LLPs was paid monthly, and partnership and proper worship were required to be filed quarterly.
5. Straightforward Registration
Each process can be done through the GST portal, from getting GST registration numbers to monthly and quarterly return filing. Companies that comply with Goods and Services Tax do not need to visit any government office, resulting in more time for businesses to focus on their growth.
6. Efficient Supply Chain
Due to various indirect taxes, companies maintained warehouses in various states to avoid unnecessary tax burdens. They can now easily pay these taxes for the center and states when creating the invoice for transporting the stocks, resulting in no requirement to pay any taxes while moving from different states.
Disadvantages of GST
1. More Tax Burden
Under the previous tax regime, businesses with over Rs 1.5 crore of annual turnover were required to pay excise duty. But now businesses with over Rs 40 lakhs of annual sales pay Goods and Services Tax.
2. Compliance Burden
The companies must register with GST in all states where they perform business activities. They are also required to issue GST-compliant invoices, maintain digital records, file returns before the last due date, and register with regulating bodies. All these processes have become costly as well as challenging for small businesses.
3. Negative Impact on Realty Sector
GST has an adverse impact on India’s real estate sector. The prices of real estate properties have increased by up to 8%, causing decreased demand for real estate by 12%. However, it’s considered a short-term downfall that might be revived in the coming years.
4. Comparatively Higher Costs
With the implementation of GST, the operating cost of businesses has significantly increased. These businesses are required to purchase GST-compliant accounting or ERP solutions. Employee training, IT system upgrades, and talent acquisition have also increased operating costs.
GST, an abbreviation of Goods and Services Tax, officially became applicable on July 1, 2017, in India as a proper replacement for a variety of indirect taxes, including VAT, excise duty, and service tax, that taxpayers – individuals and corporates – required to pay.
With the implementation of GST across the country, levies by state & central governments have somehow simplified the indirect tax system, improved compliance, and increased revenue and transparency. However, GST has some negative impacts, including a higher tax burden on SMEs, penalties for non-compliance, and increased operational costs.