Updated on: Oct 30th, 2023
11 min read
Hailed as one of the biggest tax reforms of the country, the Goods and Services Tax (GST) subsumes many indirect taxes which were imposed by Centre and State such as excise, VAT, and service tax. It is levied on both goods and services sold in the country.
Any reform is bound to have advantages and disadvantages. In this article, we will talk about both the advantages and disadvantages of GST:
Let us look at the advantages to start with:
GST is a comprehensive indirect tax that was designed to bring indirect taxation under one umbrella. More importantly, it is going to eliminate the cascading effect of tax that was evident earlier.
Cascading tax effect can be best described as ‘Tax on Tax’. Let us take this example to understand what is Tax on Tax:
Before GST regime
A consultant offering services for say, Rs.50,000 and charged a service tax of 15%
(Rs.50,000 * 15% = Rs.7,500).
Then say, he would buy office supplies for Rs.20,000 paying 5% as VAT
(Rs.20,000 *5% = Rs.1,000).
He had to pay Rs.7,500 output service tax without getting any deduction of Rs.1,000 VAT already paid on stationery.
His total outflow is Rs.8,500.
|GST on service of Rs.50,000 @18%
|Less: GST on office supplies (Rs 20,000*5%)
|Net GST to pay
Earlier, in the VAT structure, any business with a turnover of more than Rs.5 lakh (in most states) was liable to pay VAT. Please note that this limit differed state-wise. Also, service tax was exempted for service providers with a turnover of less than Rs.10 lakh.
Under GST regime, however, this threshold has been increased to Rs.20 lakh, which exempts many small traders and service providers.
Let us look at this table below:
|5 lakhs in most states
|20 lakhs (10 lakhs for NE states)
Under GST, small businesses (with a turnover of Rs.20 to 75 lakh) can benefit as it gives an option to lower taxes by utilising the Composition scheme. This move has brought down the tax and compliance burden on many small businesses.
The entire process of GST (from GST registration to filing returns) is made online, and it is super simple. This has been beneficial for start-ups especially, as they do not have to run from pillar to post to get different registrations such as VAT, excise, and service tax.
Our Clear GST software helps you with filing of accurate GST returns ahead of due dates.
Earlier, there was VAT and service tax, each of which had its own returns and compliances. Below table shows the same:
|Proprietorship / Partnership – Quarterly
Company / LLP – Monthly
|Is different for different states
Some states require monthly returns over a threshold limit.
Some states like Karnataka require a Monthly return
Under GST, however, there are fewer returns to be filed. Therefore, the number of returns to be filed has come down. There are about 11 returns under GST, out of which 4 are basic returns that apply to all regular taxable persons under GST. The main GSTR-1 is filed to report list of sales invoice and related documents for the tax period.
The next return is GSTR-2A and GSTR-2B that are dynamic and static auto-drafted returns with input tax credit details reported as available or not for a taxpayers during the tax period. The summary return in form GSTR-3B contains both sales and ITC information, any refund details as well as details of non-GST supplies for the tax period. This return is filed to report the taxes payable, ITC claimed and taxes paid for the tax period.
Before GST regime, supplying goods through the e-commerce sector did not have separate rules. It had variable VAT laws. Let us look at this example:
Online websites (like Flipkart and Amazon) delivering to Uttar Pradesh had to file a VAT declaration and mention the registration number of the delivery truck. Tax authorities could sometimes seize goods if the documents were not produced.
Again, these e-commerce brands were treated as facilitators or mediators by states like Kerala, Rajasthan, and West Bengal which did not require them to register for VAT.
All these differential treatments and confusing compliances have been removed under GST. For the first time, GST has clearly mapped out the common provisions applicable to the e-commerce sector across India and since these are applicable all over India, there should be no complication regarding the inter-state movement of goods anymore.
Read a more detailed analysis of the impact of GST on e-commerce.
Earlier, the logistics industry in India had to maintain multiple warehouses across states to avoid the Central Sales Tax and state entry taxes on inter-state movement. These warehouses were forced to operate below their capacity, giving room for increased operating costs.
Under GST, however, these restrictions on inter-state movement of goods have been lessened.
As an outcome of GST, warehouse operators and e-commerce aggregators players have shown interest in setting up their warehouses at strategic locations such as Nagpur (which is the zero-mile city of India), instead of every other city on their delivery route.
Reduction in unnecessary logistics costs is already increasing profits for businesses involved in the supply of goods through transportation.
Visit here to read more about the impact of GST on logistics.
In the pre-GST era, it was often seen that certain industries in India like construction and textile were largely unregulated and unorganised.
Under GST, however, there are provisions for online compliances and payments, and for availing of input credit only when the supplier has accepted the amount. This has brought in accountability and regulation to these industries.
Let us now look at the disadvantages of GST. Please note that businesses need to overcome these disadvantages to run the business smoothly.
Businesses have to track GST updates regularly. They must ensure that their accounting or ERP software gets updated in real time for GST legal and portal updates. Else, they can go for a GST compliance solution to ensure continuous compliance. But both the options involve money to be invested and needs time commitment for training employees so that there is efficient utilisation of the new GST software.
Clear has a ready-to-use, enterprise-grade GST solution- ClearGST software. Ensure compliance with latest GST laws and rules through AI-powered reconciliations, insightful reports, end-to-end GST return filing, automated Table-4 reporting in GSTR-3B and much more!
Many small businesses in India are adapting GST changes with every passing month. When the law was first introduced, they had learn to issue GST-complaint invoices, be compliant with digital record-keeping, and of course, file timely returns. This means that the GST-complaint invoice issued should have had mandatory details such as GSTIN, place of supply, HSN codes, and others.
These same invoices can be easily imported through various options for accurate return filing through the ClearGST platform.
GST changed the way taxes are paid and returns are filed. Businesses needed to employ tax professionals who had expertise to stay GST-complaint. This gradually increased costs for small businesses as they had to bear the additional cost of hiring experts.
Also, businesses needed to train their employees in GST compliance, further increasing their overhead expenses. A plug-and-play, SaaS-based solution such as ClearGST allowed taxpayers to ensure compliance at reasonable cost.
Initially, as GST was implemented on the 1st of July 2017, businesses followed the old tax structure for the first 3 months (April, May, and June), and GST for the rest of the financial year 2017-18.
Businesses found it hard to get adjusted to the GST regime, and some of them ran these tax systems parallelly, resulting in confusion and compliance issues.
Unlike earlier, businesses are had to switch from pen and paper invoicing and filing to online return filing and making payments. This was tough for some smaller businesses to adapt to.
The process for GST return filing on ClearGST is easy to follow. Business owners need to only upload their invoices through easy-import options, and the software will populate the return forms automatically with the information from the invoices for an error-free end-to-end filing. Any errors in invoices will be clearly identified by the software in real-time, thus increasing efficiency and timeliness.
Smaller businesses, especially in the manufacturing sector have faced difficulties under GST. Earlier, only businesses whose turnover exceeded Rs.1.5 crore had to pay excise duty. But now any business whose turnover exceeds Rs.20 lakh have to pay GST.
However, SMEs with a turnover upto Rs.75 lakh can opt for the composition scheme and pay only 1% tax on turnover in lieu of GST and enjoy lesser compliances. The catch though is these businesses will then not be able to claim any input tax credit. The decision to choose between higher taxes or the composition scheme (and thereby no ITC) continues to be a tough one for many SMEs.
Change is definitely never easy. The government is trying to smoothen the road to GST. It is important to take a leaf from global economies that have implemented GST before us, and who overcame the teething troubles to experience the advantages of having a unified tax system and easy input credits. GST continues to evolve well from the past years by involving AI and ML in data analytics. The measures have plugged revenue leakages and has also catered to auto-populating different returns with more validated details to avoid errors at source.
The key is to be GST-compliant at any time. Continue reading our articles and watch our GST tutorial videos.
I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more
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