Advantages and Disadvantages of GST
Goods and Services Tax
Goods and Services Tax (GST) is one of the biggest indirect tax reforms of the country. It seeks to subsume all indirect taxes levied on goods and services by the Central and State governments. GST, a destination based indirect tax, levies on manufacture, sale and consumption of both goods as well as services. It provides single and cooperative linkup between Indian markets to boost the economy.
GST was launched in India on 1st July 2017 in a midnight function at the Central Hall of Parliament by Prime Minister Narendra Modi and then President of India Pranab Mukherjee. Hence, July 1st is celebrated as “GST Day” every year.
At every stage of purchase and sale of goods and services, GST would be levied and collected based on the Input tax credit system. It was a historic paradigm shift towards “One Nation, One Tax, One Market”. GST was implemented through the Constitution (One hundred and First Amendment) Act 2016. The GST is governed by the GST Council with Union Finance Minister being its Chairman.
GST is classified as CGST (Centre GST), SGST (State GST), UTGST (Union Territory GST) and IGST (Integrated GST).
After understanding the meaning and classification of GST, let’s discuss what the advantages and disadvantages of GST are:
Advantages/ Benefits of GST
GST would help in creating a single and unified Indian market which makes the economy stronger. It will benefit the Government as well as the consumers in the long run thus creating a win-win situation for both. Some of the advantages of GST are enlisted as follows:
- Mitigation of Cascading Effect
Under the GST regime, the final tax would be paid by the consumer for the goods and services but there would be an input tax credit system in place to ensure that there is no cascading of taxes.
GST would be levied only on the value added at every stage unlike the earlier scenario wherein Tax is also required to be paid on Tax in few cases i.e. VAT is payable on Excise duty. Cascading taxation can be described as ‘Tax on Tax’. Let’s understand this with an example:
Before the GST regime:
A product whose base price is Rs.100 and after levying excise duty of 12 per cent (assumed), the value of the product would be Rs. 112.
On the sale of such goods, VAT is levied at 12.5 per cent (assumed) and the value to the ultimate consumer is Rs. 126.
Under GST regime:
Under the GST system, the product whose base price is Rs.100 will be charged at 18 per cent of GST (CGST + SGST), then the value to the ultimate consumer is Rs. 118.
- Abolition of Multiple layers of taxes
GST integrated the different line of taxes like Central Excise, Service Tax, Sales Tax, VAT etc. into one tax. This helps to avoid multiple taxes earlier being levied on goods and services.
- Development of Common National Market
Implementation of GST introduced a uniform taxation law across country and different sectors in respect to indirect taxes. It would make it easier to supply goods and services hassle-free across the country. It helped in removing economic distortions and formed a common national market. GST gave a boost to India’s tax to gross domestic product ratio and thus help in promoting economic efficiency and sustainable long-term economic growth.
- Reduced Litigation
GST will help in reducing the litigation regarding taxation as it brings clarity regarding the jurisdiction of taxation as against the present structure where there still exists uncertainty regarding jurisdiction of taxation by Centre and State in few cases like in case of Software, Right to use of Goods etc. Under GST Regime, there would be smooth assessments as compared to the previous multiple assessments in different tax laws.
- Efficient Administration by Government
Earlier, the administration of indirect taxation was a complicated task for the government, but under the GST regime, with the unified tax rate, simple input tax credit mechanism and integrated GST Network, information would be readily available and administration of resources would be easy and efficient for the Government.
- Improved efficiency of logistics
Earlier, the logistics industry in India had to maintain multiple warehouses across states to avoid the CST and state entry taxes on inter-state movement. These warehouses were forced to operate below their capacity, giving room to increased operating costs. Under the GST regime, these restrictions on inter-state movement of goods have been lessened.
- Unorganized Sector is regulated under GST
In the pre-GST era, some industries in India, for example, textile and construction were largely unregulated and unorganized. However, GST has provisions to bring these industries into accountability and under-regulation.
- Ease of Doing Business
Implementation of GST helps in reducing the difficulties in indirect tax compliance, which adversely affects the ease of doing business in India. Unlike under GST regime, earlier companies faced major issues with respect to the registration of VAT, excise, customs and service tax; movement of goods; dealing with tax authorities; settling tax disputes; availing tax incentives, and obtaining a timely tax refund.
- Tackling Corruption and Tax Leakages
The Indian GST will have a mechanism of matching of invoices. The input tax credit of purchased goods and services will only be available if the taxable supplies received by the buyer get matched against the taxable supplies received by the supplier. The Goods and Services Tax Network which is responsible for IT backbone is geared up to match more than three billion invoices per month. This would be a self-regulating mechanism. This will not only check tax frauds and tax evasion but also bring in more and more businesses into the formal economy. In the new GST regime, the tax-payer can register, file returns and make payment of taxes on a single portal on the net. Thus, corruption will be checked to a large extent as it will become increasingly difficult for the taxpayer to evade taxes and he will have minimal interaction with the tax authorities.
Disadvantages of GST
GST is one of the biggest tax reforms undertaken by the Government which pave the way for the concept of “One Nation, One Market, One Tax”. However, any tax reform of such magnitude comes with certain teething problems. Let us now look at some of the disadvantages of GST:
- IT Infrastructure
GST is an IT-driven law and it cannot be assured whether all the States and Union Territories in India are currently equipped with infrastructure and requisite manpower to embrace this law. Except for few States like Karnataka, Maharashtra and Gujarat, who have pioneered the E-Governance model, we have not heard about this trend in other States and Union Territories. In some States, even today only manual VAT returns are in vogue. They also need to be taken on board.
- Petroleum Products Does Not Fall Under GST Slabs
Petroleum products are being kept outside the scope of GST as of now. States will levy their own taxes on this sector. Tax credit for inputs will therefore not be available to related industries like the plastic industry which are heavily dependent on petroleum products. So, the inclusion of petrol in GST is expected but there is no deadline on the horizon yet.
- Higher Tax Burden on SMEs
Small and Medium Enterprises in the manufacturing sector bear difficulties under the GST regime. In the Pre-GST era, excise duty was paid only by the businesses whose turnover exceeded Rs 1.5 crore. But now under the GST regime, any business whose turnover exceeds Rs 20 lakh will have to pay GST.
- Registration in the Different States
GST needs businesses to register in all the states they are operating in. This will increase the burden of compliance.
- Training of Tax Officers
In any new law, the old law, as well as the new thought process of trust, needs to be imbibed. The learning of GST provisions is imperative. All central and state government officers whether in VAT, service tax, excise or customs would have to learn the GST provisions. Further, GST law heavily banks on Information Technology and hence proper training has to be given to the departmental officers for effective usage and implementation.
The launch of GST in India with effect from July 1, 2017, was a transformative reform and changed the way businesses were done in India. All stakeholders have welcomed the reform. The GST regime brings in more and more businesses into the formal economy. A radical change of this magnitude is bound to bring about some pain. The gains of this little pain are going to be many and long-lasting for the Indian economy.