GST: Merits and Demerits of Goods and Services Tax in India

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The Government of India levies a tax on supplies of goods and services in India under a unified taxation system, GST (Goods and Services Tax). Along with the advantages of GST, there are several demerits of this new taxation system.

Further, this tax reform was initiated to end the traditional tax system that included several indirect taxes like VAT, service tax, CST, and more. Here are some merits and demerits of the Goods and Services Tax in India.

GST: Merits and Demerits of Goods and Services Tax in India

GST advantages

Given below are some benefits of GST implementation that will help an individual understand GST meaning precisely.

  • Eliminates multiple layers of tax: Under the new taxation system, different tax structures like Central Excise, Service Tax, Luxury Tax, Sales Tax, etc., are brought under one umbrella forming a unified system. Therefore, it simplifies the tax structure for several businesses.
  • Cancels out cascading effect of taxes: Unlike the previous taxation system, the GST regime allows consumers to pay a final tax on the goods or services they purchase. This eliminates the “tax on tax” effect that was evident during VATs and other service taxes.
  • Small businesses can avoid lengthy taxation procedures: Service provider companies in India can enjoy tax exemption if their annual turnover is less than Rs.20 lakh. In the case of North-Eastern states, the turnover limit is Rs.10 lakh. Therefore, small businesses need not follow lengthy taxation procedures making it one of the advantages of GST.
  • Composition schemes: Businesses with a turnover of up to Rs.75 lakh can avail of composition schemes under the GST regime and pay only 1% tax on their turnover. This lowering of the tax rate has reduced the compliance burden appreciably. Furthermore, business owners can reduce their financial burden by securing a business loan from reputed lenders. Moreover, several lending institutions provide pre-approved offers for a seamless loan application process. You can check your pre-approved offer by submitting basic details like name and contact details.
  • Reduces logistics cost: Previously, there were many warehouses across states to ensure the elimination of current CST and state entry taxes. This often led to check-post discrepancies. However, one can expect a 20% drop in logistics costs due to border tax elimination under the current taxation system. Therefore, this is an important parameter that weighs the advantages and disadvantages of GST.

Apart from the advantages of GST, several sectors and businesses are negatively affected by this tax regime.

Disadvantages of GST

The shift from the traditional tax system to the unified Goods and Services Tax has been hard to grasp for various individuals and businesses. Here are some demerits of GST one should know:

  • Tax burden on Small and Medium Enterprises (SMEs): The impact of GST on Small and Medium businesses has been beneficial as well as challenging at the same time. Previously, these enterprises had to pay excise duty only if their turnover was more than Rs.1.5 crore. However, under the current taxation system, businesses with a turnover exceeding Rs.40 lakh are liable to pay GST. Although businesses with an income of Rs.75 lakh can avail of composition schemes, they cannot claim credit for tax input.
  • Upgradation of software leading to increased costs: To make a business GST compliant, there needs to be a proper installation of GST software. The installation costs and that of training employees to use the software can be hefty for a business.
  • Increased compliance burden: Under the GST regime, companies operating in different states need to register for GST in particular states. The registration process includes GST-compliant invoices, digital record keeping, and filing returns. These procedures have increased the burden on various sectors. Therefore, this has a negative impact on wholesalers and retailers.
  • Small companies are not well-versed with the online procedure: With the digitisation of several processes concerning the tax system, several small-scale industries are finding it difficult to get on board with the GST structure.
  • Effects on manufacturing sectors: Due to the complex GST structure, manufacturers have suspended their reward programs, affecting the consumers.

Other than this, the transaction fees in the financial sector have increased from 15% to 18%, and insurance premiums are more expensive, which goes against the advantages of GST.

Therefore, it is vital to factor in the disadvantages and advantages of GST to understand the entire tax structure in detail.

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