Advantages and Disadvantages of GST for Business, SMEs and Consumers

Introduced in 2017, 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.

What is GST?

GST is an indirect, comprehensive, multi-stage, destination-based tax scheme replacing older indirect taxes like excise duty, service tax, VAT, etc.

In the supply chain, goods go through numerous changes of hands, starting from the manufacturing stage until the sale to the final consumer. GST is taxed at each of these stages, hence multi-stage.

There is always some extra value added at each stage of production. Say a manufacturer who makes cakes purchases sugar, flour, and other ingredients. The value increases when the sugar and flour are mixed with other ingredients and baked into a cake. When the warehousing agent packs and stores the cakes, there is an addition of value to the product again. When the cakes are sold to the retailer, investing in marketing and storing the cakes, there is additional value. So, GST is levied on all these value additions.

Another point is that GST is levied only on the additional value at every production stage. Also, GST is only charged at the point of consumption, meaning it is imposed where the goods are sold and not where they are manufactured.

Objectives of GST

To achieve the ideology of ‘One Nation, One Tax’

Having a single tax system enables every state to follow the same rate of indirect taxes for the same service or product. One of the advantages of GST is that it makes the administration of taxes simpler for the governments. Tax compliance is more effective with the elimination of the tedious multiple deadlines and forms for different indirect taxes.

Besides, having a single tax system allows the government to introduce laws for E-invoicing for transactions and e-way bills for transportation of goods. This is one of the many advantages of GST.

To subsume a majority of the indirect taxes in India

Previously, there were several indirect taxes for different services and goods manufacturing like VAT, Excise, and such, which were levied at different supply chains. Some taxes were under the purview of the Central Government, and some were under the purview of the State Governments. A uniform tax code for indirect taxes was absent.

One of the other advantages of GST is that under it, all indirect taxes on goods and services were subsumed into one. It has eased the administration of taxes by the government and reduced the burden of tax compliance on the taxpayers.

To eliminate the cascading effect of taxes

One of the many advantages of GST is that it has eliminated the cascading effect of taxes and guaranteed the smooth flow of input tax credits across services and goods alike. This is because, under the GST scheme, tax is levied only when net value is added during the means of production and storage.

To curb tax evasion

Of the many advantages of GST, this is a big one, as due to its stringency, it has curtailed tax evasion. Since taxpayers can now only claim the input tax credit on invoices uploaded by the suppliers, the chances of producing a fake invoice have been drastically reduced. Also, after the introduction of a centralized surveillance system to monitor the taxes, clampdown on defaulters has become quicker and more efficient.

To increase the taxpayer base

GST has widened the tax base in India and increased the number of tax-registered businesses. Stringent laws related to input tax credits have brought many unorganized sectors, like the construction industry, under the purview of the tax net. This demonstrates one of the advantages of GST.

Online procedures for ease of doing business

Previously, while the filing of returns was done online, most of the refund procedures and assessment happened offline. Now, every procedure relating to indirect tax under GST is done almost entirely online. Doing business in India has become simplified and more efficient due to this.

We also recommend you read our article on MSME Registration Benefits.

An improved logistics and distribution system

The burden of producing multiple documentation for goods supply is reduced. Also, a single indirect tax system reduces transportation cycle times, turnaround times, the supply chain is improved along with warehouse consolidation. The e-way bill system has removed the need for interstate checkpoints resulting in reduced warehousing costs and high logistics. This demonstrates one of the many benefits of GST.

To promote competitive pricing and increase consumption

With uniform GST rates, the price of products and services in India have become more in tune with global prices, thereby increasing consumption and revenue. One of the other important advantages of GST.

Advantages of GST

GST mitigates the cascading effect of other taxes

The major drawback of the indirect taxation system existing before GST came into being 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

AFTER GST

** 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 eliminating the cascading tax effect. As a result, businesses do not need to pay multiple taxes. It means enhanced fluidity of the processing of taxes and, more importantly, reducing the costs of products and services in the long haul. Subsequently, it provided a huge relief to the small and medium businesses.

Increased window for registration

Previously, a business with an overall turnover of more than Rs 5,00,000 was required to pay VAT, although the limit differed from state to state. 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.

Introduction of Composite Scheme for added benefits

One of the many advantages of GST is the introduction of the composition scheme under which small taxpayers can choose to pay GST at a fixed rate of turnover and rid themselves of tedious GST formalities. Any taxpayer with a turnover of up to Rs 1.5 crores can opt for this scheme. 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. With that being said, e-commerce operators, ice cream, tobacco & pan masala manufacturers, and interstate suppliers cannot avail of this scheme.

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

Simple and easy procedures to follow

Under GST, the process of registration and filing returns has been made incredibly simple, with all procedures done entirely online. The digitalization made 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. Start-ups, especially, have benefitted from this. This again demonstrates one of the advantages of GST.

Resourceful Government Administration

The GST Council plays a very statesmanship-kind of role in implementing GST and keeping a regular check on updating the way it functions. One of the many advantages of GST is that the administration of taxes has become easier for the government. The newly integrated comprehensive tax rate, a simple mechanism of tax input credit, and the availability of tax information due to a merged network of GST have been highly beneficial for the government.

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.

The number of compliances is lesser

Before GST was implemented, there were separate compliance periods for different taxes. For excise, returns were filed on a monthly basis. Partnership and proprietorship companies had to file for service tax returns every quarter, and so on. One of the many advantages of GST is that taxpayers can file returns only once.

Defined treatment for E-commerce operators

Previously, there was no clear definition for supplying goods in the e-commerce sector. There were numerous variable VAT laws related to it. All these confusing compliances and differential treatments for different sectors have been removed, and clear provisions have been made for the e-commerce sector as well. The obstacles with regard to the interstate movement of goods have been removed as well, thereby demonstrating one of the other advantages of GST.

Improved efficiency of logistics

Previously, the logistics sector had to set up and maintain multiple warehouses in different states to avoid paying taxes for interstate transportation. It resulted in poor operation of the warehouses and increased maintenance costs. One of the advantages of GST is that the restrictions on inter-state transportation of goods have been reduced, thereby reducing unnecessary logistics expenses and increasing profits for businesses.

Unorganized sector is regulated under GST

Before GST was introduced, specific sectors like construction and textile were mainly left unorganized and unregulated. Now, provisions have been made for online compliances and modes of payments for these sectors. There is also a provision that allows availing of input credit only after the supplier has accepted the amount due. As demonstrated, one of the advantages of GST is that it brings accountability and proper regulation in the organized sectors. 

Disadvantages of GST

Increased costs with respect to software & yearly upgradation

One of the few demerits of GST is the increase in costs of upgrading the older accounting software to a GST-compatible one. Many businesses needed to buy a new GST software in order to keep the business functioning. Plus, employees must be trained to be efficient with the new billing software. This increases the costs of maintaining a business even further.

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. Small and medium-sized enterprises may not still be up to date with the nuances and regulations of the GST scheme. Even an inadvertent mistake in failing to file GST returns can lead to severe consequences and attract large penalties.

Late filing attracts a late fee of Rs. 100 per day per, i.e., Rs. 100 under CGST & Rs. 100 under SGST, totaling 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.

Further, 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. This demonstrates one of the grave disadvantages of GST.

Adapting an online structure for the new tax system

One of the other disadvantages of GST is faced primarily by the small and medium-sized enterprises or SMEs. Those companies who do not have their payment and returns filing system of taxes digitized, could have a difficult time transitioning from an offline, pen and paper invoicing mechanism to an almost total online payment and returns filing system.

Moreover, online forms, online registrations and other online compliances has increased costs of installations, leading to overhead costs and difficulty in managing the system.

Increased compliance burden

One of the biggest GST drawbacks is that it is now mandatory for companies to register themselves on the GST portal of every state they have a business operation. The entire process of maintaining invoices, documents, and filing returns in every state, can be cumbersome – an additional burden for companies that already have to deal with numerous bureaucratic hurdles.

Impact on working capital

Working capital is the money required for the day-to-day running of a business. Many enterprises, especially SMEs, have seen a negative impact on their working capital after the implementation of GST. Operational costs have gone up, while traders and exporters have not been able to claim their tax returns promptly. Even services have become more expensive due to a negative impact on the company’s working capital. This demonstrates one of the other disadvantages of GST.

GST for SMEs

Despite some disadvantages of GST like increased operational costs, adapting to an online mechanism for filing of returns and making payments, various fines and penalties, SMEs have benefitted from implementing a one market-one tax scheme. The logistics expenses have been lowered, compliance has been enhanced, the tax burden has been lowered, and it has become much easier to launch new businesses.

Furthermore, the traditional taxation system had a lot of room for errors as well as fraudulent behavior 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.

At a glance, some advantages and disadvantages of GST for SMEs are:

GST for Consumers

There are many advantages of GST for consumers as well, and they must be aware of it.  The prices of consumer goods can drop with the reduction in manufacturing costs. Traders not registered under GST cannot charge the CGST and SGST on their own.

• To mark a few advantages and disadvantages of GST for consumers – 

To conclude

It is clear that the implementation of GST has revolutionized the indirect tax system in India. Despite some of the disadvantages of GST, like having a negative impact on the working capital of SMEs, increasing unnecessary compliance burden on businesses, increasing operational costs due to software degradation & employees training, and such, the benefits of GST outweigh its drawbacks.

Some of the advantages of GST include mitigation cascading effects of other taxes, simple procedures for filing returns and payments, cutting logistics costs, regulating unorganized sectors of business, curbing fraud, and reducing prices of goods for the consumers. 

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