Advantages and Disadvantages of GST: A Balanced Perspective

The Goods and Services Tax (GST) is one of the most significant tax reforms in India’s history. Introduced on July 1, 2017, GST replaced a complex structure of indirect taxes with a unified tax regime. While it has simplified taxation and boosted transparency, it has also faced criticism for its challenges in implementation. This blog explores the advantages and disadvantages of GST, providing a balanced perspective with Indian examples.

Advantages of GST

1. Simplification of Tax Structure

GST subsumes multiple indirect taxes such as excise duty, VAT, service tax, and customs duty, offering a single, transparent tax structure.

Example:

Before GST, a manufacturer in Tamil Nadu paid excise duty on production and VAT on sales. Now, all these taxes are combined into a single GST, reducing confusion and compliance burden.

2. Elimination of Cascading Tax Effect

GST eliminates the cascading effect of taxes, where tax is levied on previously taxed amounts, leading to reduced tax on final goods.

Example:

A furniture maker buys raw materials worth ?10,000 (including ?1,800 GST). On selling the furniture for ?20,000, the GST payable is ?3,600, but the input tax credit of ?1,800 is adjusted, reducing the tax burden.

3. Boost to Ease of Doing Business

GST simplifies interstate trade by implementing a uniform tax structure across India, making the country a single market.

Example:

A company in Delhi selling goods to Maharashtra previously dealt with different tax systems. GST’s unified framework ensures seamless trade without the need for multiple tax registrations.

4. Transparency and Accountability

GST is largely technology-driven, requiring online registrations, return filings, and tax payments. This reduces corruption and increases accountability.

Example:

The introduction of e-invoicing ensures real-time tracking of transactions, reducing tax evasion and improving compliance.

5. Encouragement to Formal Economy

GST incentivizes businesses to register and comply with tax regulations, bringing more enterprises into the formal economy.

Example:

Small traders and service providers now prefer GST registration to avail input tax credits and expand their business network.

6. Reduced Logistic Costs

The removal of entry taxes and check posts under GST has significantly reduced transit times and logistics costs.

Example:

A logistics company transporting goods from Mumbai to Bengaluru saves time and fuel due to the streamlined GST system.

Disadvantages of GST

1. Complex Compliance Requirements

Businesses, especially small and medium enterprises (SMEs), often struggle with GST’s compliance requirements, such as filing multiple returns.

Example:

A small retailer in Rajasthan must file GSTR-1, GSTR-3B, and annual returns, which can be overwhelming without professional help.

2. Increased Tax Burden for Some Sectors

GST has increased the tax rates for certain goods and services, making them costlier for consumers.

Example:

Restaurants charging 18% GST find it challenging to attract customers compared to the pre-GST era when taxes were lower.

3. Technical Challenges

Frequent updates and technical glitches in the GST portal often disrupt business operations.

Example:

During peak filing times, businesses in Kerala face delays and errors due to server issues on the GST portal.

4. High Rates on Luxury Goods

The 28% GST rate on luxury items and sin goods has raised concerns about affordability and market demand.

Example:

The automobile industry witnessed a dip in sales as GST increased the prices of mid-range and luxury cars.

5. Impact on Small Businesses

Small businesses not equipped with technological resources struggle with the digital nature of GST compliance.

Example:

A local kirana store in Bihar faces difficulties in maintaining digital records and filing GST returns without external assistance.

6. Delay in Refunds

Exporters and businesses often face delays in GST refunds, impacting their working capital and financial stability.

Example:

An export company in Gujarat experienced delays in receiving IGST refunds, leading to cash flow issues.

A Balanced Perspective

Positive Impacts:

Unified tax system fostering transparency and efficiency.

Encouragement of a formal economy through incentives like input tax credit.

Enhanced ease of doing business by removing interstate tax barriers.

Negative Impacts:

Challenges for small businesses due to compliance and digital requirements.

Increased prices for some goods and services.

Occasional technical and administrative hurdles.

GST: A Work in Progress

The GST system, while beneficial in many respects, continues to evolve. Ongoing efforts by the government aim to address challenges like compliance complexity, delayed refunds, and technical issues. Initiatives such as the GST 2.0 return system promise further simplification and efficiency.

Conclusion

The Goods and Services Tax has undoubtedly transformed India’s taxation landscape. While its advantages like transparency, reduced tax cascading, and ease of doing business have been widely recognized, the challenges cannot be ignored. A balanced perspective helps in understanding GST’s impact on different sectors and stakeholders. As India continues to refine this system, GST remains a cornerstone of economic reform, fostering growth and formalization in the country.