GST Benefits – Advantages and Disadvantages of GST

GST or Goods and Services Tax, the most awaited and biggest taxation reform in Indian economy has been in buzz for numerous reasons. While everyone has their own opinion the majority is still unable to figure out their take on as to GST is a boon or bane. Well, the reasons might differ from person to person but we bring to you the most common, the prima facie advantages and disadvantages of GST, having broadly an equivalent impact on everyone.

Advantages – The pros of GST

Let us take the various benefits as introduced by GST in our indirect taxation system one by one

Classification has become easier

One of the persistent issue in old tax practices was the classification of a product in good or service. The tax implications and liability were majorly dependant upon this classification. Resultantly, it had both, an open route for litigation and huge operational inconveniences.

Gst has resorted all such issues by introducing the one and only concept of supply. The taxation under GST is based upon the concept of supply and not upon the classification into goods or services. If a transaction does not fall into the ambit of supply it will not be taxable under GST.


Better Compliances and tracking

Since the procedures and compliances have radically concised with implementation of GST, it has bought harmony in numerous compliances previously required. Before GST there were many laws each having its own set of procedures, legal requirements and due dates. Gst has subsumed all major taxes and has resultantly reduced the compliance under on the taxpayer. Also, enabled easy monitoring and tracking of defaults or non compliances.

Single window clearances (SWC)

Multiple legal compliances under different legislatures required lot of efforts and time. GST being the one indirect tax has opened up a way to single window clearance. Now the taxpayer can focus more on its core business as legal norms only under one statue would be needed to be adhered.


Complete set off of ITC:

Before introduction of GST a complex set of procedure was being followed for set off of Input tax Credit. Goods and Services Tax being a single tax regime both at

  • Central Level (CGST) and
  • State Level (SGST / UTGST)

has proved to be a boon for the taxpayers by ensuring maximum input credit set offs.

Example

A teacher provides services of Rs.32000. The service tax would be charged in old taxation system @15% i.e.15% of Rs 32000 = Rs. 4800. Also, he purchased a furniture for his Institute for say Rs 50,000 and paid 5% VAT on Rs. 50,000 i.e. 2500/- on this purchase. Show the benefit or impact the teacher will get after GST.

Old RegimeTotal Tax AmountNew Regime (GST)Tax Amount
In Previous indirect tax regime he had to pay output service tax at Rs 4800 without getting credit of furniture purchase and also paid VAT of Rs 2500.Total outflow in old regime ( 4800+2500)  Rs. 7300But under GST we can get set-off of tax already paid i.e. while paying 4800 benefit of Rs 2500 already paid would be availed and net amount should only be paid.Net outflow under GST (4800-2500) i.e. Rs. 2300

The Dual GST Model:

India being a federal country has adopted GST in its dual model. Which means the GST is levied simultaneously by both as per central government laws and as per state government laws as well. Currently tax is being imposed on inter state supply by the central government and simultaneously by state and central government on intrastate supplies. GST applies to whole of India including the state of Jammu and Kashmir


Easy catch on Tax Evasions

GST has proved out to be a helping hand of government in keeping effective and improved catch on tax evasions. One of the prominent evidences of the same are increased numbers of tax revenue. Evasion tracking has been made simpler with reduction in procedural requirements and subsuming of various laws into GST.

Removal of Deficiencies in the existing VAT system

Various ills of Value Added System as mentioned under have been overcome with implementation of GST,

  1. The non inclusion of several local taxes in the state VAT law. Like luxury tax, entertainment tax etc
  2. Existence of cascading effect due to
  • Non VATable CST and
  • CENVAT was imposed over  the value of VAT
    1. Non integration of VAT & Service tax
    2. Double taxation of a transaction as both goods and services

Mitigation of cascading effect

One of the major drawbacks in the indirect tax system was the cascading effect i.e. tax imposed on taxes paid on an earlier stage. For an example: A manufacturer was required to pay excise on raw materials + VAT was also imposed when the finished goods were sold. The excise so paid at earlier stage formed part of the cost of raw material and hence when final payout for VAT was made it included a component of excise on which VAT is being paid.GST has given freedom to taxpayers form this biggest ill of the tax system.

Example:

Before GST A Manufacturer Charge for a product 4,92,800

Cost40,0000
Excise + Cess 10%40,000
Total4,40,000
VAT 12%52,800
Total4,92,800

Under GST
Cost4,00,000
CGST 9%36,000
SGST 9%36,000
Total4,72,000

Composition scheme for small businesses

Under GST Small businesses with an aggregate turnover of Rs 20 lakh to Rs 1 crore can be benefited. The composition scheme gives an option to pay taxes at lower rates.

The taxpayer can opt for composition scheme if the turnover does not exceed Rs 75 lakh in the north eastern states of
  • Arunachal Pradesh,
  • Assam,
  • Manipur,
  • Meghalaya,
  • Mizoram,
  • Nagaland,
  • Sikkim,
  • Tripura,
  • Himachal Pradesh

For the rest including Uttarakhand and Jammu Kashmir the turnover limit will be Rs 1 crore. A person crossing such limit cannot take benefit of composition levy and would be required to pay taxes as per the normal provisions.


GST positive impact on SMEs and startups

With the rolling out of GST SMEs and startups are said to be benefited in multiple ways. Find below a brief about the dimension in which SMEs and startups have been benefited by GST

  • Ease of starting business by lower compliances
  • Reduced tax burden on new businesses
  • Improved and faster logistics enabling efficiency in delivery and saving costs
  • Easier compliances by elimination of distinction between goods and services
Ease of starting business

A business which operates in different states and territories was previously required to comply with multiple laws. The centralised registration enabled by GST will make the setting up of new business easier and also effective by reduction in costs. Also, the procedural requirements thereafter would zero down by a single law.

Reduced tax burden on new businesses

Previously, business having turnover more than Rs 5 lakhs were required to take registration under VAT. But this ceiling under GTS has been extended to Rs 20 lakhs. Which has given relief to over 60% of SMEs

Improved and faster logistics

GST has abolished the entry tax for goods manufactured and sold in any part of India. Which will enable smooth and faster transportation of goods by reduction in waiting time on check posts. This will in turn boost the economy by saving huge transportation costs and time.

Easier compliances

GST follows one simple concept of supply and taxability under GST depends over the same. Previously, lot of hassle and litigations were involved in deciding whether a transaction falls under the ambit of goods or service. The taxation aspect was majorly dependent upon such classification. The ambiguity has been resolved by the newly introduced GST regime.


Increased product competitiveness

GST being a welcome step towards reduction in overall costs of production supply and at all stages, will over the time have substantial effect in making the Indian products competitive in international market resulting from reduced prices.

Many countries have already switched their tax models to GST and India being a way forward the same is expected to achieve the incidental benefits in future.


Disadvantages – The cons of GST

Higher tax burden on SMEs

The hardship for SME in terms of taxes payout seems to build stronger under GST due to the following reasons

  • Registration limits under the previously prevalent excise law ie.. Rs 1.5 Crores was much higher than the current GST threshold of Rs 20 / 40 lakhs
  • Although the taxpayers having turnover upot the extent of Rs 1 crore  can still opt for composition levy. But, the same brings with itself the in build repercussions like
  • Non issue of VAtable invoices
  • Non availment of ITC
  • Not able to pass on the tax credit etc

Higher tax rates

Previously, on service the service tax was levied at 15% tax rate but now if the same falls under the GST tax rate category of 18% then the resultant pay out form the taxpayers pocket seems to have increased. The same has already shown its effect in the sectors like telecom, airlines, banking etc.


Compliances in the middle of the financial year

GST was rolled out in India from 1st July 2017 and the financial year was started from 1st april 2017. The implementation of GST has led to huge inconvenience on the part of taxpayers. As normally it is witnessed that the tax planning is done well in advance for the particular financial year and shifting to a completely new tax regime which is being introduced for the first time is a challenging acceptance in itself. This left the taxpayers confused and a lot of operational difficulties arose.


Not all goods covered

Petrol being the key product still remains out of the ambit of GST. It has become one of the major controversial issue. Because crude oil being a commodity of general and vast usage is still acquainted with higher prices and no relaxation in the same has been provided with the implementation of GST.


Taxation becoming Online

Though with the technology getting pace in all sectors an online taxation reform is welcomed. But, everything comes with a cost. So does this!! Considering the user base online taxation reform has left people helpless and being dependent upon experts. The online form, online registration and all compliances being done online has increased costs of softwares, installations and requisite staff to the businessman.


Excessive compliance burden:

The number of tax returns to be filed under GST is enormous. Three periodic returns are required to be filed monthly. Not only that if a person is doing business in multiple states then it needs to obtain multiple registrations for each state and separate GST returns needs to be filed for each state.

This structure of GST has increased compliance burden and it is causing pain mainly for small businesses which cannot spend high costs on support functions like accounting and taxation etc.


Blockage of Working capital

Working capital is the essence of every business. Implementation of GST has led to shortening of available funds in the hands of business. The exporters are not able to claim the tax refunds till date even after so much time after implementation of GTS has already lapsed. Even the traders are facing issue in claiming their transitional refund due to procedural difficulties and even striving harder to mitigate the shortages of operating funds due to rolling out of this new taxation reform. Also, the increased rate of GST in service sector has further increased the payouts by 3% as GST @18% is payable in exception to the old 15% service Tax.

CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.