Advantage & Disadvantage of GST for Business

Advantages and Disadvantages of GST for Business, SMEs and Consumers

A complete list of advantages of GST as well as its disadvantages and how it impacts businesses, SMEs and consumers.

The Goods and Services Tax (GST) has been hailed as one of the biggest tax reforms of the country. It was designed to bring all indirect taxes levied by the central and state governments such as VAT, service tax, and excise under one umbrella. A reform as big as this that is a game-changer for the entire business community is bound to have its pros and cons. Let us talk about some of the advantages of GST and its disadvantages.

 

Top Advantages of GST 

 

1) GST mitigates the cascading effect of other taxes

The major drawback of the indirect taxation system existing before GST came into effect was the cascading effect. To be more precise, it means tax imposed on tax paid at an earlier stage. For example, a manufacturing unit had to pay excise for the raw materials, and later on VAT when the finished products were sold. In such a scenario, the manufacturer needed to pay both excise as well as VAT at different stages of the business. This can be interpreted in the below table:

 

BEFORE GST

Cost

5,00,000

Excise + Cess 10% **

50,000

Total

5,50,000

VAT 12%

66,000

TOTAL

6,16,000

AFTER GST

Cost

5,00,000

CGST 9%

45,000

SGCT 9%

45,000

TOTAL

5,90,000

** For a business offering services, the excise would be replaced by service tax.


 

As one can see, one of the biggest advantages of GST is that it has given businesses freedom from multiple taxes, and provided a huge relief to them, especially the small and medium businesses.

 

2) Window for registration has now increased

In the earlier tax structure, businesses with a turnover of more than Rs. 5 lakhs (differed in some states) had to pay VAT. There was an exemption of service tax for service providers who had a turnover of less than Rs. 10 lakhs. However, the advantage of GST regime is that the turnover has been increased to Rs. 20 lakhs, thereby exempting many small service providers and traders.

 

3) Introduction of Composite Scheme for added benefits

The composition scheme is a simple and easy scheme under GST. With this scheme, small taxpayers can get rid of tedious GST formalities and pay GST at a fixed rate based on their turnover. Businesses having turnover below Rs. 1.5 crore can avail of this benefit. The turnover limit for northeastern states and Himachal Pradesh is Rs. 75 lakhs. The turnover of all businesses registered with the same PAN should be considered while calculating the turnover.

The businesses that cannot avail this composition scheme are businesses manufacturing ice cream, pan masala, tobacco, traders making interstate supplies, NRIs, or business supplying goods through e-commerce.

The conditions for availing this scheme are:

  • Taxpayers cannot claim ITC
  • Taxpayers cannot supply goods which are under GST
  • Taxpayers have to pay at normal rates for transactions under the reverse charge (RCM) mechanism
  • Taxpayers have to register all segments of business under the same PAN or opt out of the scheme
  • Taxpayers have to mention “composition taxable person” on all bills generated and display the same on his business place
  • A manufacturer can supply services either to the extent of 10% of turnover or 5 lakhs, whichever is higher

 

4) Simple and easy procedures to follow

Another advantage of GST is that it has subsumed all major indirect taxes resulting in better compliance and tracking. The entire GST process, from registration to filing returns has been made online. This entire process is simple and easy to understand, thus making it beneficial to businesses, especially small and medium businesses and startups. Now they do not have to visit different departments to register themselves or meet compliances from VAT, excise and service tax departments.

 

5) Resourceful Government Administration

The GST system in India runs under strong technical support with more features to be extended to digitize GST further. The GST Council plays a very statesmanship-kind of role in implementing GST and keeping a regular check on updating the way it functions. The simplified GST returns filing system put in place by the administration has made MSMEs less dependent on tax experts when compared to the previous regime. The government rationalized the composition scheme and introduced a quarterly filing option for those businesses having a turnover value of less than 1.5 crores. This decision has proved fruitful for many small businesses.

 

Advantages of GST


Top Disadvantages of GST 

 

1) Increased costs with respect to software & yearly upgradation

A primary disadvantage of GST is that businesses have had to either update their existing accounting and software systems to make it GST-compliant or purchase new GST-related software to keep their businesses running in compliance with the GST system. This has led to incurring additional costs for purchasing or upgrading such software and also to train their employees to work efficiently on this new system.

 

2) Penalizing on failing to file the GST on date

The GST council has laws that clearly define the description of penalties levied in case of late filing or non-filing of GST within the stipulated date. Even an inadvertent mistake can lead to severe consequences.

Late filing attracts a late fee of Rs. 100 per day per, i.e., Rs. 100 under CGST & Rs. 100 under SGST, totalling Rs. 200/day (subject to change), the maximum is Rs. 500. Along with the late fee, an interest has to be paid at 18% per annum. The time period for the same will be from the next day of filing to the date of payment.

Non-filing of GST returns means that subsequent returns cannot be filed. For instance, if the August GSTR-2 return is not filed then the next return i.e., GSTR-3 and the subsequent returns of September, cannot be filed.  Hence, late filing of GST return will have a spilling effect leading to heavy fines and penalty.

 

3) Adapting an online structure for the new tax system

With the advancement in technology, all sectors are going through an online transformation. The same goes for online tax reforms. Though, it is done to ease the process, this change to online technology might become tough for some smaller businesses who have always had the traditional pen and paper approach. Considering the user base who have still not found it easy to accept this change, online taxation reform has left lot of businesses helpless and dependent on experts. Online forms, online registrations and other online compliances has increased costs of installations, leading to overhead costs and difficulty in managing the system.

 

4) Increased compliance burden

One of the biggest disadvantage of GST is that businesses have to face is the enormous number of tax returns that have to be filed under GST. There are three periodic returns required to be filed every month. Additionally, organizations have business in multiple states have to obtain multiple registrations for each state where they operate the business and separate GST returns have to be filed for each state. This structure has increased the compliance burden, mainly for small businesses that cannot spend high costs on functions like taxation and accounting. SMEs may find it cumbersome to grasp the nuances of this new GST system, as they would need to comply with timely returns, digital record-keeping, and issue GST-compliant invoices.

 

5) Impact on working capital

Working capital is the money a business needs for everyday operations. Lack of working capital can lead to a situation where businesses might not be able to operate their operations smoothly. Implementation of GST has led to blockage of working capital. One of the disadvantages of GST is that many exporters have still not been able to claim tax refunds even long after the implementation of GST. Due to procedural difficulties, traders are also facing issues in claiming their transitional refund. Further, a GST of 18% in the service sector has increased payouts by 3% as opposed to 15% of service tax in the earlier system.

 

 

Top disadavantages of GST

GST for SMEs 

What Small Business should know about GST?

GST means businesses have to pay tax to the government on the money spent on wholesale merchandise. There are two aspects to GST, input and output. Input GST is the tax that a business has been charged by the supplier, while output GST in the tax that the businesses charge its customer. Under this system, a business will typically collect more GST than it has to pay out. This difference is what the business pays the government.

The traditional taxation system had a lot of room for errors as well as fraudulent behaviour that could result in legal implications and affect the day-to-day working of the business. The main advantage of GST is that it aims to simplify the taxation structure for small businesses by bringing all taxes under one umbrella.

However, businesses who are new or small businesses have the additional burden of understanding the tax system such as filing returns, input tax credit and payment procedures to run the business smoothly and in compliance with GST.

 

How can GST affect a small business?

One advantages of GST for small businesses is that it improves the ease of doing business or starting a business in India. Now that GST has been implemented, small businesses do not have to go through the lengthy procedure of getting VAT registration that used to differ from state to state. GST has made all registrations centralized and standardized since a single GST registration is applicable across the country.

 

GST requires every registered business to self-assess its tax and file the returns on a monthly and annual basis. GST returns have to be filed electronically, thereby reducing errors and lapses. However, small businesses should understand the entire system well, as they might have to wait for long periods to claim their tax refund. While large corporates can afford to have money blocked, small businesses might find it difficult to operate if a huge amount is blocked in this process.

In short, some advantages of GST are:

  • Improves the ease of doing business for small businesses
  • GST exemption for small businesses that have a turnover of less than Rs. 10 lakhs
  • Centralized taxation system that eliminates other indirect taxes and its procedures

 

However, some disadvantages that small businesses may face include:

  • Additional software expense
  • Higher taxes for SMEs with an annual turnover of above Rs. 20 lakhs
  • Learning curve for small businesses to incorporate online methods in their functioning

 

 

GST for SMEs

GST for Consumers

What Consumers should know about GST?

The ultimate burden of any tax scheme is borne by the consumer, and it is the same for GST. It means that all entities in the chain i.e., traders, dealers, wholesalers will pass the tax towards the purchase of that commodity. Hence, consumers should have certain awareness so that traders who are not registered under GST do not charge the CGST and SGST on their own. GST has a slab rate for different products such as foodgrains, essential commodities, large appliances, demerit goods like tobacco products, pan masala, aerated drinks, etc. These rates range from 0% to 28%. Consumers should make themselves aware of what products fall under what slab to know they are being taxed appropriately.

 

How can GST affect a consumer?

The advantage of GST for consumers is the infrastructure

  • Due to the lower burden of taxes on manufacturers, the costs will be reduced, which in turn reduces the price of consumer goods
  • Lower prices lead to more demand and consumption, while increased demand will lead to an increase in supply, ultimately leading to rise in production
  • Increased production can lead to more employment opportunities in the long run
  • Centralized taxation and billing means curb on tax frauds, leading to curb on black money, thus impacting the economy and infrastructure
GST for consumers

The disadvantage of GST for consumers include:

  • GST is presently charged at 15% on services but can reach 28% on some services, thereby increasing the cost of services like banking, telecom, airlines, etc.
  • If actual benefits of lower taxes are not passed on to the consumers, prices will increase
  • Increased prices will lead to increased monthly expenses and revised household budgets
  • A check on the prices and profits needs to be undertaken by authorities so that consumers can enjoy the real benefit of GST

GST is a huge change within the Indian taxation system, and changes are definitely not going to be easy. By complying with all the norms, India can overcome all the teething problems associated with GST and experience the positives of a unified tax system.

 

 

 

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