The primary motive behind the launch of GST was to eliminate various indirect taxes, so the cascading effect of taxes can be minimised. Cascading tax effect can be best understood as “Tax on Tax.” Here is an example to offer more clarity on this:
Before the launch of GST regime:
A consultant offering services worth INR 40,000 is charged a service tax of 15%, which means he pays INR 40,000 * 15% = INR 6000 tax.
For office supplies worth INR 20,000, he pays 5% as VAT (Rs 20,000 * 5% = INR 1000).
An output service tax worth INR 7000 is paid by him without getting any deduction of INR 1000 VAT already paid on stationery.
After the launch of GST Regime:
GST on service of INR 40000 @18% 7000
Less: GST on office supplies (Rs 10,000*5%) - 1000
Net GST to pay = 6000
2. Higher threshold for Registration
In the earlier tax structure, businesses with an annual turnover of more than INR 5 lakh were liable to pay VAT, which differed state-wise. The service tax has also been excluded for businesses whose turnover was above INR 10 lakh.
Under the current GST regime, this threshold has been increased to INR 20 lakh, which has disadvantaged many small traders and service providers.
3. Lower Burden of Tax Compliance for small businesses
The small businesses with annual turnover between INR 20 to 50 lakh have been benefitted under the new GST system all thanks to new composition schemes. Under the composition scheme, the tax and compliance burden on small businesses has been reduced to a great extent.
4. Easy and Hassle-Free Return Filing Facility
Under the new GST system, the entire process of return filing has been made online, which is extremely simple. This has benefited the new and emerging fin-tech businesses greatly as they can stay tax compliant by filing the return online without any hassle of doing multiple registrations, i.e., VAT, excise, etc.
5. Easy compliances Measures
In earlier tax structure, both VAT and service tax had their own returns and compliance measures, which were largely cumbersome and hectic to abide by for many businesses.
On the flip side, under GST, there is just one unified return that needs to be filed by businesses. So, the compliance measures have been brought down to a great extent.
6. Simplified Tax Measures for E-commerce operators
Before the GST regime, supplying goods through e-commerce sector was not defined, and there were variable VAT laws. Here is an example to explain in detail:
Online e-commerce operators (like Flipkart and Amazon) were required to file a VAT declaration along with the delivery truck registration number while delivering goods to states like UP. Tax authorities could sometimes seize goods if such documents were unavailable. In contrast, states like Kerala, Rajasthan, and some others did not require e-commerce operators to register for VAt, as they treat such online brands as facilitators or mediators.
All such differential treatments and confusing compliances have been eradicated under GST.
Clearly, provisions have been identified for the e-commerce sector related to the applicability of taxes under the GST system. Also, as these new tax laws were applicable all over India, there is no ambiguity about the inter-state movement of goods among tax authorities.
7. Improvement in Logistics Efficiency
Logistics operators were required to maintain multiple warehouses across states before the GST to avoid the state entry taxes on inter-state movement. These warehouses were also restricted to operate below their actual capacity, which also increased operating costs.
However, under the current GST system, the restriction on the inter-state movement of goods has been reduced to a great extent.
Now with the launch of GST, e-commerce operators are also looking to establish their warehouses at more strategic locations like Nagpur (zero-mile city), instead of every other location countrywide in order to save logistics costs.
8. Unorganised sector is Now Governed under GST
Industries like construction and textile were largely unregulated and unorganised before the emergence of GST. Now, provisions for online compliance, payments, and input tax credit has been added under GST for the suppliers, when they accepted the amount. This has also increased accountability and regulation in these industries.
Disadvantages of GST
1. Increased Operating Expenses Due to Purchase of New GST Software
The existing accounting or ERP software is now required to be updated from businesses end to make them GST-compliant. If not, they must buy a new GST software so that they can keep their business going.
But both of these are an expensive option for businesses. For effective utilisation of newly purchased GST software, training to employees is also necessary, which further increase the operating expenses for companies.
2. Staying GST-compliant in Difficult for Small Businesses
Small and medium-sized enterprises (SME), not signed for GST have to grasp the nuances of the new GST tax regime quickly.
Issue GST-compliant invoices, digital record-keeping, and filing timely returns are all necessary for small businesses to stay compliant. This also means that GST-complaint invoices issued by such businesses must also contain mandatory details like GSTIN, place of supply, HSN codes, and others.
3. GST was a Mid-Year Financial Shock for Businesses
As we know, until the 1st of July 2017, businesses in India were abiding by the old tax structure for the first three months (April, May, and June), and the rest of the year they were required to comply with GST.
Hence, adjusting to the new tax regime was very difficult for businesses. Some businesses have opted to run both these tax systems parallelly, which further increased the confusion and made compliance difficult.
4. Online Taxation System makes Things Difficult for Small Vendors
Switching from pen and paper invoicing to online return filing and payment is a bit difficult for small vendors in India due to lack of training and prior experience with online IT systems. In the coming years, familiarizing with online return filing systems would still be difficult for small vendors.
Although, using high advanced Gen GST e-filing and billing Software can be a solution for small businesses in India. The process for return filing on Gen GST is very simple and can be done in a few easy steps. Business owners can simply upload the invoices, and the software will populate the return forms automatically with accurate information from invoices. Any errors in invoices are also identified automatically in real-time; thus increases efficiency and timeliness during return filing.
5. Higher tax burden on Small Businesses
Earlier, businesses, especially in the manufacturing sector, whose turnover was above INR 1.5 crore had to pay excise duty. But now with GST, any business whose turnover exceeds INR 20 lakh is required to GST. Small businesses have faced the most difficulties related to GST.
Although, option for opting for composition scheme and pay only 1% tax on turnover in lieu of GST has been provided to small businesses with a turnover upto INR 75 lakh under GST. But, the actual point is that despite such facility, these businesses are restricted to claim any input tax credit. The decision to choose between a composition scheme or a higher tax bracket is a tough one for many SMEs.