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Benefits of GST: Understanding the Advantages and Disadvantages of GST

The most anticipated and significant tax change in the Indian economy, the Goods and Services Tax (GST), has prompted a lot of discussion for a number of reasons. Everyone has a different view, but most people are still unsure about whether they believe GST is a good thing or a bad thing. Though the reasons might differ from person to person, we present the most widespread benefits and drawbacks of GST. You can go through them to understand the impact of GST on your business.

 

Table of Contents:

 

Understanding the Basics of GST

The Goods and Services Act was put into effect in 2017 with the goal of simplifying the indirect tax system in order to do away with the cascading tax effect. The state and federal governments imposed a number of indirect taxes on products and services at different points in time, which were replaced by this tax system. Its simple strategy seeks to support the government in achieving the goal of "One Nation, One Tax."  This table highlights the indirect taxes that have been replaced by GST:

Jurisdiction of Tax

Types of Tax

Indirect taxes imposed by the Central Government of India

  • Central Sales Taxes

  • Central Excise Duty

  • Service Tax

  • Countervailing Duty

  • Special additional custom duty

Indirect taxes imposed by the State Governments

  • State VAT

  • Purchase tax

  • Luxury tax

  • Taxes on Advertisement

  • Entry tax

  • Octroi duty

  • Tax on lottery, gambling and betting


Advantages of GST

GST eliminates the cascading effect of taxes:

The GST was set up as a complete indirect tax to streamline indirect taxes. Furthermore, it will eliminate the tax cascade effect that was earlier seen.  The best explanation of the cascading tax effect is "tax on tax." To better understand what tax on tax is, let's look at this example:


Illustration

Before the GST regime:

A 15% service tax was imposed on a consultant who charged, say, Rs. 50,000 for their assistance (Rs. 50,000 15% = Rs. 7,500). At Rs. 20,000, he would pay 5% VAT for office supplies (Rs. 20,000 5% = Rs. 1,000). Despite having already paid Rs. 1,000 in VAT on stationery, he was still required to pay Rs. 7,500 in output service tax. He spends Rs. 8,500 in total.

After the GST regime:

GST applicable on service of Rs.50,000 @18%= Rs. 9000

Less: GST on office supplies (Rs 20,000*5%)= Rs. 1000

Net GST payable= Rs. 8000


A higher registration threshold:

A company with an annual profit of more than Rs. 5 lakh (in the majority of states) was previously obligated to pay VAT under the VAT system. Note that each state had a different restriction. Additionally, service providers with less than Rs. 10 lakh in revenue were excused from paying service tax. However, under the GST regime, this barrier has been raised to Rs. 20 lakh, exempting a large number of small business owners and service providers. The following table shows the threshold limits:

Tax

Threshold Limits

Excise

Rs. 1.5 crores

GST

Rs. 20 lakhs (Rs. 10 lakhs for NE states)

Service Tax

Rs. 10 lakhs

VAT

Rs. 5 lakhs in most states


 Ease of composition for small enterprises:

Small businesses (those with annual revenue between Rs. 20 and Rs. 75 lakh) may benefit from the GST because it provides the opportunity to lower taxes by using the Composition plan. For many small enterprises, this approach has reduced the tax and regulation load.


Simple online process:

From enrollment in GST to presenting returns, the entire process is done online and is straightforward. New businesses specifically have benefited from this since they no longer have to hurry to obtain many registrations, including VAT, excise, and service tax.


Fewer compliances:

In the past, there were separate filings and compliance necessities for service tax and VAT. The same is illustrated in the table below:

Tax Type 

Return Filing Timelines

Excise

Monthly

Service Tax

Proprietorship / Partnership: Quarterly 

Company / LLP: Monthly

VAT

Timelines vary for different states, with some requiring monthly returns over a threshold limit. Conversely, states like Karnataka require a Monthly return.


However, there are fewer returns to file under GST. As an outcome, there are now fewer applications to file. Four of the approximately eleven returns under GST are basic returns, which are relevant to all regular taxable persons. To report a list of sales receipts along with papers for the tax period, the main GSTR-1 is filed. The following returns consist of GSTR-2A and GSTR-2B, which are auto-drafted, dynamic, and static returns that report whether or not a taxpayer's input tax credit data was accessible during the tax period. Sales and ITC data, refund information, and non-GST supply details for the tax period are all included in the summary return on form GSTR-3B. The taxes owed, the ITC claimed, and the taxes paid for the tax period are all stated on this form.


Special consideration for online retailers:

There were no particular laws governing the supply of goods through e-commerce before the GST regime. Its VAT laws were flexible. For example, when shipping to Uttar Pradesh, online retailers such as Flipkart and Amazon had to fill out a VAT declaration and include the delivery truck's registration number. If the paperwork was not presented, tax officials had the right to confiscate goods. Similarly, states such as Kerala, Rajasthan, and West Bengal did not need these e-commerce businesses to register for VAT because they were viewed as mediators or facilitators. GST removed all of these inconsistent policies and unclear compliances. The common regulations pertaining to the e-commerce industry in India are explicitly set out for the first time by the GST, so there shouldn't be any more complications with regard to the interstate movement of goods.


Enhanced logistical efficiency:

In the past, India's logistical industry had to keep multiple warehouses spread across various states to avoid state entry taxes and the national sales tax on interstate travel. Due to the necessity of operating below capacity, many warehouses had to raise operational expenses. However, these restrictions on the transportation of products throughout states have been eased under the GST. The introduction of the Goods and Services Tax (GST) has prompted warehouse operators and e-commerce aggregators to establish their facilities in important places, like Nagpur, India's zero-mile city, rather than in every other place along their delivery path.  Companies that deliver goods through transportation are witnessing an increase in earnings due to cutting unnecessary logistics costs.


Impact on the unorganised sector:

Before the GST, it was noted that some Indian industries, such as textile and construction, were mainly unstructured and unregulated. However, under GST, there are facilities for online compliance and payments, and for obtaining input credit only once the supplier has approved the payment. As a result, these industries are currently subject to accountability and regulation.


Disadvantages of GST

Cost increases as a result of purchasing software:

Companies must constantly track GST developments. For GST law and portal revisions, they need to ensure that their accounting or ERP software is updated currently. If not, they may opt for a GST compliance solution to guarantee ongoing conformity. However, all methods require financial investment and time commitment for staff training in order to ensure effective use of the new GST software.


Failure to comply with GST may result in fines:

In India, a growing number of small enterprises are adapting to the GST changes on an ongoing basis. When the law was originally enacted, they had to learn how to file returns on time, issue invoices that were GST-complaint, and comply with digital record-keeping. Therefore, the required information, including the GSTIN, the place of supply, the HSN codes, and others, should have been included in the GST-complaint invoice that was issued.


Operating costs increased as a result of GST:

The GST modified the procedure for filing returns and paying taxes. Employing tax experts with experience was necessary for businesses to be GST-compliant. Small businesses had to pay significantly to hire experts, resulting in a gradual increase in costs. Additionally, companies had to teach staff members about GST compliance, which raised overhead costs even more.


Complexities of implementation during the fiscal year:

Businesses first used a previous tax structure for the first three months (April, May, and June) after the launch of the Goods and Services Tax (GST) on July 1, 2017, and then shifted to the GST for the remaining months of the 2017–18 fiscal year. Businesses struggled to adapt to the GST regime, and some operated these two systems concurrently, which led to misunderstandings and problems with compliance.


Getting used to a fully online taxing procedure:

Businesses now use online return filing and payment processing instead of pen-and-paper invoicing and filing. Some smaller companies found it challenging to adjust to this. However, this can be simplified by seeking expert guidance.


Tax burden is higher for SMEs:

GST has created challenges for smaller companies, particularly those in the manufacturing industry. Only companies with annual revenue over Rs. 1.5 crore were previously required to pay excise duty. However, businesses that generate more than Rs. 20 lakh in revenue need to pay GST. But SMEs with up to Rs. 75 lakh in revenue can choose the composition plan, which allows them to pay just 1% of sales in lieu of GST and have fewer compliance requirements. However, the problem is that these companies will thereafter be unable to collect any input tax credits. Many SMEs find it difficult to decide between greater taxes and the composition scheme, which eliminates the ITC.


Conclusion

It is never easy to change. The tax administration is making efforts to make switching to GST easier. We should learn from countries that have already adopted the GST and have overcome the first challenges to enjoy the benefits of a single tax system and simple input credits. Through the application of AI and ML in data analytics, GST has continued to improve in previous years. To prevent errors at the source, the processes have solved income leaks and auto-populated many returns with more accurate information.


FAQ

Q1. What is the main advantage of GST?

The primary benefit of GST is that it will lessen the industry's tax burden. Price reductions and increased demand could arise from it, which would support the expansion of the manufacturing industry.


Q2. What is the disadvantage of GST?

GST's main drawbacks are higher operating expenses, a larger tax obligation, penalties, fines, etc.


Q3. Did the GST system work well in India?

The uniformity of the tax system is being significantly helped by the Goods and Services Tax (GST). It has contributed to substantial revenue growth and made tax implementation easier. However, a lot more work needs to be done. The GST system is going to operate even more smoothly once more organisations register.


Q4. Is GST a success or failure?

The GST has had both beneficial and detrimental effects. On the one hand, it has been successful in giving the tax system uniformity; on the other hand, taxpayers are sometimes finding it difficult to comply with its legal requirements.


Q5. Will GST help the Indian economy?

With its national taxing arrangement, GST can boost the Indian economy. This may bring about price reductions, increased consumption of goods and services, tax system uniformity, etc.


Q6. What is the monthly return in GST?

Every month, all registered taxpayers file the GSTR-3B GST return. It gives details on the sales, purchases, taxes paid, and other relevant information from the preceding month.


Q7. What is the limit for GST annual returns?

Those who are registered taxpayers and have an annual turnover of more than Rs. 2 crores must file GST returns every year.


Q8. What is the importance of GST in India?

The elimination of the tax cascade effect was one of the main goals of the GST. In the past, taxpayers were prohibited from applying for tax credits from one tax against the other because of differential indirect tax legislation. For instance, the excise taxes paid during production could not be deducted from the VAT due at the time of sale.


Q9. What is the need for GST?

Unifying the nation under a single tax system is the primary goal of the GST. Its objective, which it has managed to achieve over the years, is to remove multiple types of taxes. The government replaced the current indirect taxes with the GST in order to achieve a number of additional targets.


Q10. What are the GST rates in India?

Companies are required to register for GST if their total revenue exceeds a certain threshold, which is currently Rs 40 lakhs for the majority of states and Rs 20 lakhs for special category states. The kind of goods or services determines the GST rate. They fall into four major slabs: 5%, 12%, 18%, and 28%. A complicated network of indirect taxes, including VAT, service tax, excise duty, and others, is replaced by GST. It gives the tax structure consistency, clarity, and simplification. Except for a few products including petrol, human-consumption alcohol, and specific kinds of transactions, most goods and services are subject to GST.


Q11. What does GST mean for small businesses?

GST makes it easier for small enterprises to follow the rules through the composition system and threshold exclusions. It enables their employment in the mainstream economy and reduces their tax burden.


Q12. What are the consequences of not following GST rules?

You risk fines, interest on unpaid taxes, and in the worst circumstances, a conviction if you violate the GST guidelines. The GST Act defines various penalties for particular offences.




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