GST Benefits – Advantages and Disadvantages of GST
GST Benefits – Advantages and Disadvantages of GST
Mar 19, 2024
15 Mins
Introduction:
Regarded as one of the most significant tax reforms in the country, the Goods and Services Tax (GST) combines various indirect taxes imposed by the Centre and State, such as excise, VAT, and service tax. It is applicable to both goods and services sold within the country.
Every reform has its own advantages and disadvantages. In this article, I will discuss the advantages and disadvantages of GST:
Let's begin with the advantages:
Advantages of GST
1. Elimination of the cascading effect of tax
GST is a comprehensive indirect tax that aims to unify and simplify indirect taxation. Most importantly, it eliminates the cascading effect of tax that was present before.
The cascading tax effect is best described as 'Tax on Tax.' To better understand this concept, let's consider an example:
Before the GST regime:
A consultant provides services for Rs. 50,000 and charges a service tax of 15% (Rs. 7,500).
Then, let's say the consultant purchases office supplies worth Rs. 20,000 and pays a VAT of 5% (Rs. 1,000).
Previously, there was no deduction for the VAT already paid on stationery, so the consultant had to pay the output service tax of Rs. 7,500 without any deduction.
The total outflow was Rs. 8,500.
Under GST:
GST on service of Rs. 50,000 at 18%: Rs. 9,000
Less: GST on office supplies (Rs. 20,000 * 5%): Rs. 1,000
Net GST to pay: Rs. 8,000
2. Higher threshold for registration
Previously, under the VAT structure, businesses with a turnover of more than Rs. 5 lakh (in most states) were liable to pay VAT. However, under GST, this threshold has been increased to Rs. 20 lakh, exempting many small traders and service providers.
Let's take a look at the table below:
Tax Threshold Limits
Excise 1.5 crores
VAT 5 lakhs in most states
Service Tax 10 lakhs
GST 20 lakhs (10 lakhs for NE states)
3. Composition scheme for small businesses
GST provides small businesses (with a turnover of Rs. 20 to 75 lakhs) the option to lower taxes by utilizing the Composition scheme. This reduces the tax and compliance burden on many small businesses.
4. Simple and easy online procedure
The entire GST process, from registration to filing returns, is conducted online, making it super simple. This particularly benefits startups as they no longer need to go through the hassle of obtaining different registrations for VAT, excise, and service tax.
Our Clear GST software helps you file accurate GST returns ahead of due dates.
5. Reduced number of compliances
Previously, there were separate returns and compliances for VAT and service tax. However, under GST, the number of returns to be filed has significantly decreased. There are around 11 returns under GST, out of which only 4 are basic returns that apply to all regular taxable persons. This streamlining of returns simplifies the process for businesses.
6. Special treatment for e-Commerce operators
In the pre-GST era, the e-commerce sector did not have specific rules. Different states had variable VAT laws, leading to confusion. However, under GST, all e-commerce operations have been regulated uniformly across India, easing inter-state movement of goods.
7. Improved efficiency of logistics
Previously, the logistics industry in India had to maintain multiple warehouses across states to avoid Central Sales Tax and state entry taxes. However, with GST, restrictions on inter-state movement of goods have been reduced, allowing for more efficient logistics operations.
8. Regulation of the unorganized sector
GST has brought accountability and regulation to previously unregulated industries such as construction and textiles. Online compliances and payments, along with the requirement for suppliers to accept payment in order to avail input credit, contribute to the regulation of these industries.
Now, let's move on to the disadvantages of GST. It is important for businesses to overcome these disadvantages in order to operate smoothly.
Disadvantages of GST
1. Increased costs due to software purchase
Businesses need to invest in accounting or ERP software that can track GST updates and ensure continuous compliance. This requires both financial investment and time spent on training employees to utilize the new GST software effectively.
Clear offers a ready-to-use, enterprise-grade GST solution - ClearGST software - that ensures compliance with the latest GST laws and rules.
2. Penalties for non-compliance
Non-compliance with GST regulations can result in penalties. Small businesses need to adapt to the changes and ensure they issue GST-compliant invoices with accurate details such as GSTIN, place of supply, and HSN codes.
ClearGST provides easy options for importing invoices, ensuring accurate return filing and compliance on its platform.
3. Increased operational costs
GST changed taxation and return filing methods, requiring businesses to hire tax professionals with expertise in GST compliance. This increased costs for small businesses, as they had to bear the additional expenses of hiring experts and training employees in GST compliance.
A plug-and-play, SaaS-based solution like ClearGST helps taxpayers ensure compliance at a reasonable cost.
4. Mid-year implementation
The implementation of GST in the middle of the financial year caused confusion and compliance issues for businesses. The transition from the old tax structure to GST was challenging for some businesses, resulting in parallel tax systems being followed.
5. Adaptation to online taxation system
Businesses had to switch from traditional pen and paper invoicing to online return filing and online payments. This was challenging for smaller businesses to adapt to.
ClearGST offers an easy process for GST return filing, allowing businesses to upload invoices and populate return forms automatically.
6. Higher tax burden for SMEs
Smaller businesses, especially in the manufacturing sector, faced difficulties under GST, as even businesses with turnovers exceeding Rs. 20 lakhs had to pay GST. However, SMEs with turnovers up to Rs. 75 lakhs can opt for the composition scheme and pay a lower tax rate, but they are unable to claim input tax credit.
In conclusion, change is never easy. However, the government is working towards smoothing the road to GST. We can learn from other global economies that have successfully implemented GST and experienced the advantages of a unified tax system. GST continues to evolve by incorporating AI and ML in data analytics, which helps address revenue leakages and avoid errors.
Introduction:
Regarded as one of the most significant tax reforms in the country, the Goods and Services Tax (GST) combines various indirect taxes imposed by the Centre and State, such as excise, VAT, and service tax. It is applicable to both goods and services sold within the country.
Every reform has its own advantages and disadvantages. In this article, I will discuss the advantages and disadvantages of GST:
Let's begin with the advantages:
Advantages of GST
1. Elimination of the cascading effect of tax
GST is a comprehensive indirect tax that aims to unify and simplify indirect taxation. Most importantly, it eliminates the cascading effect of tax that was present before.
The cascading tax effect is best described as 'Tax on Tax.' To better understand this concept, let's consider an example:
Before the GST regime:
A consultant provides services for Rs. 50,000 and charges a service tax of 15% (Rs. 7,500).
Then, let's say the consultant purchases office supplies worth Rs. 20,000 and pays a VAT of 5% (Rs. 1,000).
Previously, there was no deduction for the VAT already paid on stationery, so the consultant had to pay the output service tax of Rs. 7,500 without any deduction.
The total outflow was Rs. 8,500.
Under GST:
GST on service of Rs. 50,000 at 18%: Rs. 9,000
Less: GST on office supplies (Rs. 20,000 * 5%): Rs. 1,000
Net GST to pay: Rs. 8,000
2. Higher threshold for registration
Previously, under the VAT structure, businesses with a turnover of more than Rs. 5 lakh (in most states) were liable to pay VAT. However, under GST, this threshold has been increased to Rs. 20 lakh, exempting many small traders and service providers.
Let's take a look at the table below:
Tax Threshold Limits
Excise 1.5 crores
VAT 5 lakhs in most states
Service Tax 10 lakhs
GST 20 lakhs (10 lakhs for NE states)
3. Composition scheme for small businesses
GST provides small businesses (with a turnover of Rs. 20 to 75 lakhs) the option to lower taxes by utilizing the Composition scheme. This reduces the tax and compliance burden on many small businesses.
4. Simple and easy online procedure
The entire GST process, from registration to filing returns, is conducted online, making it super simple. This particularly benefits startups as they no longer need to go through the hassle of obtaining different registrations for VAT, excise, and service tax.
Our Clear GST software helps you file accurate GST returns ahead of due dates.
5. Reduced number of compliances
Previously, there were separate returns and compliances for VAT and service tax. However, under GST, the number of returns to be filed has significantly decreased. There are around 11 returns under GST, out of which only 4 are basic returns that apply to all regular taxable persons. This streamlining of returns simplifies the process for businesses.
6. Special treatment for e-Commerce operators
In the pre-GST era, the e-commerce sector did not have specific rules. Different states had variable VAT laws, leading to confusion. However, under GST, all e-commerce operations have been regulated uniformly across India, easing inter-state movement of goods.
7. Improved efficiency of logistics
Previously, the logistics industry in India had to maintain multiple warehouses across states to avoid Central Sales Tax and state entry taxes. However, with GST, restrictions on inter-state movement of goods have been reduced, allowing for more efficient logistics operations.
8. Regulation of the unorganized sector
GST has brought accountability and regulation to previously unregulated industries such as construction and textiles. Online compliances and payments, along with the requirement for suppliers to accept payment in order to avail input credit, contribute to the regulation of these industries.
Now, let's move on to the disadvantages of GST. It is important for businesses to overcome these disadvantages in order to operate smoothly.
Disadvantages of GST
1. Increased costs due to software purchase
Businesses need to invest in accounting or ERP software that can track GST updates and ensure continuous compliance. This requires both financial investment and time spent on training employees to utilize the new GST software effectively.
Clear offers a ready-to-use, enterprise-grade GST solution - ClearGST software - that ensures compliance with the latest GST laws and rules.
2. Penalties for non-compliance
Non-compliance with GST regulations can result in penalties. Small businesses need to adapt to the changes and ensure they issue GST-compliant invoices with accurate details such as GSTIN, place of supply, and HSN codes.
ClearGST provides easy options for importing invoices, ensuring accurate return filing and compliance on its platform.
3. Increased operational costs
GST changed taxation and return filing methods, requiring businesses to hire tax professionals with expertise in GST compliance. This increased costs for small businesses, as they had to bear the additional expenses of hiring experts and training employees in GST compliance.
A plug-and-play, SaaS-based solution like ClearGST helps taxpayers ensure compliance at a reasonable cost.
4. Mid-year implementation
The implementation of GST in the middle of the financial year caused confusion and compliance issues for businesses. The transition from the old tax structure to GST was challenging for some businesses, resulting in parallel tax systems being followed.
5. Adaptation to online taxation system
Businesses had to switch from traditional pen and paper invoicing to online return filing and online payments. This was challenging for smaller businesses to adapt to.
ClearGST offers an easy process for GST return filing, allowing businesses to upload invoices and populate return forms automatically.
6. Higher tax burden for SMEs
Smaller businesses, especially in the manufacturing sector, faced difficulties under GST, as even businesses with turnovers exceeding Rs. 20 lakhs had to pay GST. However, SMEs with turnovers up to Rs. 75 lakhs can opt for the composition scheme and pay a lower tax rate, but they are unable to claim input tax credit.
In conclusion, change is never easy. However, the government is working towards smoothing the road to GST. We can learn from other global economies that have successfully implemented GST and experienced the advantages of a unified tax system. GST continues to evolve by incorporating AI and ML in data analytics, which helps address revenue leakages and avoid errors.
Author
Pluto Team
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