Advantages of GST - Benefits and Disadvantages Explained

Tax is an amount that individuals and companies pay to the government for the working of governmental activities like the development of roads, infrastructure and other public welfare activities. There are mainly 2 types of taxes: Direct and Indirect taxes. Direct taxes are the taxes we pay on income and profits, on the other hand, Indirect taxes are the taxes paid on the goods and services purchased.

This article explores what GST is, the benefits of GST, and the disadvantages of GST in detail. 

What is GST?

The Goods and Services Tax (GST) is a comprehensive indirect tax system that replaced various indirect taxes in the country, such as excise duty, VAT and service taxes. Implemented on July 1st, 2017, GST brought about a unified system of taxation to streamline India’s tax regime. It is a destination-based tax which means it is collected at the point of consumption. There are four types of GST: Central GST (CGST), State GST (SGST), Integrated GST (IGST) and Union Territory GST (UTGST).

Different Types of GST in India

1. CGST: This is the tax levied by the central government on intra-state transactions, which means any sale of goods or services that take place within a single state. 

2. SGST: It is the tax levied by the state government on the intra-state supplies of goods and services for any sale of goods and services.

3. IGST: It is levied by the central government on inter-state transactions, for the goods and services that are sold from one state to another.

4. UTGST: This is a tax that is similar to SGST, but it applies to union territories. UTGST tax is levied on intra-UT transactions where the goods and services happen within a union territory.

Example to Understand Before and After GST Effect in India

Before GST, a product like a laptop would incur multiple taxes at different stages of production and distribution. For example, the manufacturer paid excise duty on components, and then the distributor and retailer paid VAT. These taxes would cascade, meaning taxes were levied on top of taxes, leading to a higher final price for the consumer.

Before GST:

• Manufacturer: Raw materials cost Rs.10,000, add value of Rs.5,000, and pay 10% VAT on Rs.15,000 (Rs.1,500).
  Total cost to manufacturer: Rs.16,500.

• Wholesaler: Buys for Rs.16,500, adds value of Rs.3,000, and pays 10% VAT on Rs.19,500 (Rs.1,950).
  Total cost to wholesaler: Rs.21,450.

• Retailer: Buys for Rs.21,450, adds value of Rs.4,000, and pays 10% VAT on Rs.25,450 (Rs.2,545).
  Total cost to retailer: Rs.27,995.

After GST, all these taxes were replaced by a single tax, simplifying the process and reducing the overall tax burden. Businesses can now claim input tax credits, meaning they only pay taxes on the value addition at each stage.

After GST: 

GST helps the suppliers eliminate the cascading effect of the tax. The taxes that are paid on different items like raw materials, will be allowed to be claimed by the producers/manufacturers. Input tax credit claimed at each stage can reduce the tax liability by setting off their credit amount which is already paid for sourcing the inputs for the production and supply of a product or service.

Thus, GST reduced tax complexity and lowered the overall cost for both businesses and consumers.

Read our latest blogs “Tax Saving Investment” and “How to Save Tax” to learn more about taxation in India!

Advantages of GST

1. Simplification of the Tax Structure: 

GST came in as a revolution to the Indian tax structure. Earlier the tax system in India was highly complex and charged at different production and distribution stages. The GST’s structure made the tax payments simplified and easy for businesses.

2. Elimination of Cascading Effect:

As the Goods and Services Tax is levied only once by the government, there won't be a tax-on-tax system prevailing earlier in the Indian tax system. This reduces the overall tax burden on goods and services.

3. Registration of GST has a higher threshold: 

The threshold for GST registration is set higher when compared to the earlier tax structures like value-added tax which had a threshold of Rs.5 lakh(in many states). However, under the GST tax regime, the threshold is increased to Rs.20 lakh and Rs. 10 lakh for services, which helps small traders and service providers to be exempt from paying the tax.

4. Efficient Logistics:

Due to the various tax structures of India, the companies had to set up multiple warehouses across the states to minimize the central and interstate taxes, which increased the operational cost for the company. After the introduction of GST, these companies could easily operate their warehouses at strategic locations and deliver, than operating in every city.

5. The unorganized Sector is also regulated under GST:

Before GST, some sectors like clothing, and construction were poorly regulated by the tax systems, but under the GST regime, these sectors are regulated through various provisions and compliances.

Disadvantages of GST

1. High tax rates on certain goods:

According to the GST structure, the products are categorised under 5 different slab rates and charges. So there would be certain products that will be overpriced affecting the consumer's purchasing habits.

2. Compliance burden increases:

Small businesses and service providers might find it hard to comply with the GST requirements, due to the multiple filings and deadlines will lead to increased administrative costs.

3. Inadequate Knowledge: 

As there is no proper training given to individuals about GST compliance, it would require businesses/companies to hire tax professionals and experts to do the tasks. Else, this would result in mistakes and fines for the company.

4. GST Non-Compliance can lead to Fines: 

Since the GST tax regime is new in India, many small businesses and service providers who are still unaware of the compliance are prone to fines and penalties for not complying with the GST regulations, like tax payments and other documentation errors.

5. Small and Medium Enterprises are prone to higher taxes:

As per the earlier tax regimes, the companies having a turnover of Rs. 1.5 Crore were to pay the excise duty and other charges. But currently, all companies having a turnover of Rs. 20 lakh are liable to pay the GST.

GST Advantages and Disadvantages

Read our latest articles “RCM in GST” and “IGST Full Form” to learn more about the advantages of GST in India!

Conclusion

To wrap it up, we can agree on one thing, GST has streamlined the tax structure in India and has brought many long-term benefits including the removal of the cascading effects on taxes, better logistics management and a boost to the economy. However, like any new policy, even GST faces certain advantages and disadvantages at the micro and macro levels. Understanding the GST benefits and disadvantages of GST helps businesses and consumers make informed decisions by adapting better to this tax system.

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