When the Goods and Services Tax (GST) was introduced in India in 2017, it was a game-changer for the country’s tax system. It simplified the complex web of multiple taxes that businesses and consumers used to navigate. However, as with any major reform, there are both advantages and disadvantages to consider. In this blog, we’ll dive deep into what makes GST beneficial and where it falls short. This way, whether you are a business owner, a student, or just someone curious about how taxes work, you’ll walk away with a clear understanding of GST.
What is GST? A Simple Explanation
First, let’s break it down. GST, or Goods and Services Tax, is a unified tax that replaced many different indirect taxes like service tax, VAT (Value Added Tax), excise duty, and others. GST is applied to goods and services at every step of production, from the manufacturer to the consumer. It’s called a “destination-based tax” because it is collected at the point where goods or services are consumed, not where they are produced.
There are three types of GST in India:
- CGST (Central Goods and Services Tax): Tax collected by the central government on sales within a state.
- SGST (State Goods and Services Tax): Tax collected by the state government on sales within the state.
- IGST (Integrated Goods and Services Tax): Tax collected by the central government on sales between states.
Now, let’s get into the key advantages and disadvantages of GST.
Key Advantages of GST
1. Simplification of the Tax Structure
Before GST, the Indian tax system was chaotic. There were multiple taxes like excise duty, VAT, service tax, customs duty, etc., which not only confused taxpayers but also increased compliance costs.
Why is this important?
- Easier Compliance: Businesses no longer need to deal with different taxes and separate returns for each. GST has simplified the tax filing process. There is now one unified return form.
- Fewer Layers of Taxation: Earlier, businesses had to deal with a cascade effect where a tax was levied on a tax. With GST, this “tax on tax” has been removed. This reduces the overall tax burden.
2. Elimination of the Cascading Effect of Taxes
Before GST, if a product went through multiple stages of production, taxes were applied at every stage, leading to an increase in the overall price. With GST, this cascading effect is eliminated because tax is only applied on the value added at each stage.
How does this help?
- Lower Costs for Consumers: This means that the final price of goods is lower, benefiting consumers.
- Boost to Exports: Since GST applies uniformly, it has helped reduce the cost of production, making Indian products more competitive in international markets.
3. Increased Transparency
GST has improved transparency within the tax system. With all transactions being documented and computerized, it becomes harder to avoid paying taxes. Every business has to upload invoices for every sale or purchase, ensuring that tax evasion is reduced.
What’s the big deal?
- Reduced Black Money: By creating a system where businesses have to report their sales and purchases accurately, GST has helped reduce the circulation of black money in the economy.
- Better Compliance Monitoring: The government can now monitor tax collection and compliance more effectively, which leads to increased revenue collection.
4. Boost to the Economy
With GST simplifying the tax structure and reducing the overall tax burden, it has led to increased economic activity. Small businesses, especially in manufacturing and trading, benefit from a more level playing field.
Why should you care?
- Growth of Small Businesses: Small businesses with an annual turnover of less than ₹40 lakh are exempt from GST, which has allowed them to thrive.
- Attracting Foreign Investment: GST has made India’s tax system more straightforward, making it more attractive to foreign investors. This means more jobs and better growth opportunities for the economy.
5. Unified Market
GST has created a single, unified national market in India. Before, every state had its own taxes, which made doing business across states complex and costly. Now, businesses can operate more freely, and goods move across states without additional taxes.
Why does this matter?
- Lower Transportation Costs: With the removal of state taxes, companies no longer have to deal with tolls and long paperwork processes, speeding up the movement of goods.
- Improved Competitiveness: A single market means companies have access to a wider consumer base without the hassle of multiple state taxes.
Key Disadvantages of GST
As beneficial as GST has been, it’s not without its challenges. Here are the key disadvantages:
1. Complex Compliance for Small Businesses
While GST has simplified the tax structure for large businesses, it has also increased the compliance burden for small businesses. Small traders and manufacturers, especially those not used to digital platforms, find it difficult to adapt to the new system.
What are the challenges?
- Digital Inexperience: Many small business owners are not tech-savvy and find it hard to comply with online filing requirements.
- Increased Compliance Costs: Hiring accountants and professionals to manage the GST process has increased the overall cost for small businesses.
2. Higher Tax Rates on Some Products
GST has introduced four main tax slabs—5%, 12%, 18%, and 28%. While many essential items are taxed at lower rates, some products and services have seen an increase in their tax burden.
Why is this a problem?
- Luxury Goods Tax: Items like cars and tobacco are taxed at the highest rate (28%), which makes them more expensive.
- Impact on the Middle Class: Some services like insurance, telecom, and banking now come under the 18% slab, which has led to a slight increase in costs for everyday consumers.
3. Initial Transition Pains
When GST was first introduced, it caused some chaos in the business world. Companies had to completely change their billing, invoicing, and compliance systems. Many businesses faced short-term disruptions, leading to loss of revenue and confusion among stakeholders.
Why was it tough?
- Lack of Awareness: Many businesses were not aware of the intricacies of GST, leading to delays in filing and penalties.
- Supply Chain Disruptions: During the initial transition phase, many businesses found it difficult to adapt their supply chain processes to the new system.
4. Technical Glitches and System Downtime
The GST network, or the online platform for filing returns and invoices, has faced several technical issues since its launch. Many businesses have reported difficulties in uploading invoices, filing returns, and completing other tasks due to system downtime or glitches.
How does it affect businesses?
- Missed Deadlines: Businesses that miss their deadlines for filing due to technical issues face penalties, which adds to their frustration.
- Wasted Time: Many businesses have to spend extra hours ensuring their returns are filed properly due to system issues.
5. Not Completely Inflation-Proof
One of the goals of GST was to lower the tax burden on consumers. However, there have been instances where GST has indirectly led to inflation in certain sectors. For example, in sectors like construction and real estate, the input tax credit process is complicated, leading to increased costs that are often passed on to consumers.
Why should you care?
- Increased Prices: Consumers might notice price increases in sectors where the input tax credit process is not straightforward.
- Small Price Hikes: Although GST aims to reduce prices in the long term, there have been small price hikes in certain areas due to complications in how taxes are applied.
Current Status of GST in 2024
Since its inception, the GST system in India has undergone multiple changes and updates. Some key points to note about the current status of GST in 2024:
- GST Revenue Growth: The government’s GST collection has been steadily increasing, crossing the ₹1.4 lakh crore mark in monthly collections multiple times. This reflects better compliance and an improved tax system.
- E-invoicing and Automation: To further streamline processes, the GST Council has introduced mandatory e-invoicing for businesses with turnover above ₹5 crore. This step ensures better tracking of invoices and reduces tax evasion.
- GST Rate Changes: The GST Council frequently meets to review and update tax rates. In 2024, there have been minor adjustments to the rates, particularly for essential goods and services.
- GST on Online Services: With the rise of digital services, GST is now being applied to online platforms like OTT services, cloud storage, and other digital offerings. This has led to increased prices for digital products but ensures uniform taxation.
Conclusion: Is GST a Boon or Bane?
After considering both the advantages and disadvantages of GST, it’s clear that while it has simplified India’s tax system and increased transparency, there are still some challenges that need to be addressed. For businesses and consumers alike, GST has brought about significant changes—some good and some difficult to adjust to.
Overall, GST remains a vital reform for India’s economic growth. As the system continues to evolve and as more businesses adapt to it, the long-term benefits will likely outweigh the short-term disadvantages. Whether you are a business owner, a consumer, or just someone interested in India’s economy, understanding GST is crucial to navigating today’s tax landscape.