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Published on:

July 25, 2024

Viraaj Vashishth

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Explore GST

Top Advantages and Disadvantages of GST in India

The Goods and Services Tax (GST), which occurred on 1 July 2017, is a major tax reform in the Indian economy. It is a multi-stage, destination-based, comprehensive tax that has replaced several indirect taxes to create a single national market. This paper entails the technical structure, advantages and disadvantages of GST in India, as well as an in-depth examination of its impact.

India had a complex system of indirect taxes before the introduction of GST including Value Added Tax (VAT), Service Tax, Central Excise, and Central Sales Tax (CST) among others. The idea behind introducing GST was to eliminate the cascading effects of taxes and simplify the tax structure that was often inefficient as well as cumbersome for businesses.

Technical Structure of GST

GST has three main components which are:

1. Central Goods and Services Tax (CGST): Levied by the Central Government on intra-state supplies of goods and services.

2. State Goods and Services Tax (SGST): Levied by State Governments on intra-state supplies of goods and services.

3. Integrated Goods and Services Tax (IGST): Levied by the Central Government on inter-state supplies of goods and services.

The tax is imposed at different rates:

0%, 5%, 12%, 18% and 28%, depending on the category of products and services. Businesses can claim a credit for taxes paid on inputs through the Input Tax Credit (ITC) mechanism, which helps in reducing overall tax liability. The decisions regarding tax rates, exemptions, etc., are made by the GST Council with representatives from both central and state governments.

GST Tax Rate	Examples of Goods and Services
0%	Free educational services, including fruits, vegetables, milk, curd, bread, and healthcare, are provided by institutions, except for those obtaining services for commerce or employment purposes.
5%	Essential items like sugar, spices, tea, coffee, edible oils, medicines, domestic LPG, and transport services are provided through public sector distribution systems.
12%	Processed food items like soups, butter, frozen creams, canned fruits, bubble gum, chewing gums, milk chocolate products, and gums containing cocoa solids exceed 50% by weight.
18%	The majority of goods and services include capital goods, industrial intermediaries, financial services, liquor-serving restaurants, hotels, and telecom services.
28%	Luxury items such as high-end cars, SUVs, motorbikes over 350cc, cigarettes, tobacco products, aerated drinks, air conditioners, large TVs, dishwashers, yachts, personal aircraft, and five-star hotels.

Top Advantages of GST in India

Reduction in Cascading Effect

The cascading effect of taxes is done away with by GST; meaning that tax is not charged on tax paid at earlier stages of production anymore. Through the ITC mechanism, businesses can claim credit for taxes paid on inputs thereby reducing their overall tax liability and ultimately decreasing costs of goods and services.

Boost to Economic Growth

The advantages of GST in India include increased economic growth through widening the tax base and formalizing the economy. Higher compliance levels have resulted in increased government revenue collection through taxation. Additionally, an undifferentiated tax structure has been one more factor driving foreign direct investment to India.

Ease at performing business operations.

GST has eased doing business in India a lot. There are minimized compliance issues due to uniform tax legislation and rates. This facilitates better movement of goods across state lines by lowering transportation costs and time through the elimination of inter-state checkpoints.

Transparency and accountability

Great transparency and accountability towards the tax system are yielded by the digital nature of GST processes. Corruption and tax evasion chances have been decreased since returns are uploaded online and taxes are paid electronically. Consequently, it has made taxation seem more credible.

Good for MSMEs

A number of benefits that come with GST make it advantageous for Micro, Small, and Medium Enterprises (MSMEs). Under the scheme, small businesses whose annual turnover does not exceed Rs.1.5 crore can pay taxes at a reduced rate with easier compliance procedures or formalities. Such policy reduces the administrative burden for these people and encourages their inclusion into the formal economy too.

Top Disadvantages of GST

Effects on small businesses

On one hand, it has simplified the tax structure; on the other hand, it has imposed additional regulatory burdens on small enterprises. Small traders are now required to file returns regularly and maintain detailed registers thereby increasing their operational costs. Besides, there is a challenge for small companies that have limited resources in terms of technology requirements.

High Service Taxes

One disadvantage of GST is high service taxes. In the earlier regime before the introduction of GST, the service tax rate used to be 15% but under GST it increased to 18%. This increased level has resulted in higher consumer prices and higher delivery company rates.

Mixed Impact on Inflation

The impact of GST on inflation has been mixed. However, some items have become less expensive due to the removal of cascading effects while others show short-term inflationary pressures because they are taxed more heavily. For this reason, different sectors and regions have seen varying impacts in relation to inflation as well.

Revenue Neutral Rate (RNR) Concerns

The Revenue Neutral Rate (RNR) was meant to safeguard an equal quantum of revenue as that collected under the previous tax regime. States, however, are worried that they could lose revenues. There have also been challenges and delays with the compensation mechanism where the central government compensates states for losses in revenue.

ITC Mechanism Challenges

The ITC mechanism is good but there are complications involved in it. Businesses often find it difficult to match invoices and claim credits. These issues cause debates and delays to surface. For small businesses with limited resources, return filing processes can be tedious while claiming ITCs.

Real-Life Examples and Implications

Analysis of Different Sectors

Various segments of an economy are influenced by GST in different ways. In an instance, manufacturing has been favoured due to the removal of barriers between states and reduced logistics costs. Meanwhile, the service industry has seen higher charges of taxes together with more demands for compliance. For the real estate sector, there has been a mix of impacts where input tax credit is beneficial while changes in tax rates pose problems.

Consumer Impact

Both positive and negative impacts have been felt by consumers with regard to GST. Certain goods have become cheaper as they no longer attract cascading effects while some others have become more expensive due to increased taxes. Generally, there is a change in spending behaviour and patterns owing to GST.

Government Revenue impact

Generally, GST has increased government earnings because of a higher compliance rate and widened tax base. Although revenue collection has been affected in the short run by early implementation challenges and adjustments, efficiency in tax collection improved over time.

Future Prospects and Recommendations

Demand for Continuous Reforms

To experience the full benefits of GST in India, continuous reforms are essential. The system can be made more efficient and business-friendly by further simplifying the GST structure and harmonizing tax rates.

Infrastructure Improvement

It is important to fix the GST Network (GSTN) portal and support systems to ensure ease of compliance. With proper infrastructure and technological assistance, businesses can efficiently fulfil compliance needs, especially for small businesses.

Policy Recommendations

For the future, sector-specific challenges need to be addressed along with raising awareness and educating taxpayers. Policymakers should consider peculiar difficulties faced by various sectors and locations to bring about a more inclusive and effective GST.

Advantages of GST in India	Disadvantages of GST
Unified tax structure replacing multiple indirect taxes.	Initial implementation challenges and adaptation difficulties.
Elimination of cascading effects reduces the overall tax burden.	Increased compliance burden and operational costs for small businesses.
Boosts economic growth by broadening the tax base and formalizing the economy.	Short-term inflationary pressures due to higher tax rates on certain goods and services.
Simplifies compliance, reduces logistical costs, and ensures uniform tax laws.	Complexity in the ITC mechanism and issues with matching invoices.
Online processes enhance transparency and reduce corruption.	Frequent changes in GST laws create compliance difficulties.
Composition scheme offers lower tax rates and simplified compliance for small businesses.	Technological adaptation challenges for small traders.
Benefits various sectors through reduced logistics costs.	Higher tax rates on services increase costs for consumers and service providers.

Conclusions

Generally, the Indian tax structure has substantially been changed by GST, which comes with many benefits such as simplifying the tax structure, cutting down on the cascading effect of taxes, and improving the ease of doing business. However, it also presents certain difficulties, especially for small businesses and some sectors. It is important to weigh these pros and cons of GST in order to keep up its effectiveness in driving economic growth in India. Thus, continuous reformation and improvement are necessary to maximize the benefits and reduce the drawbacks of this system as it continues evolving.

FAQs

1. What is GST? When was it introduced into the Indian tax regime?

Goods and Services Tax (GST) is a comprehensive multistage destination-based taxation system that took effect on July 1st, 2017 in India replacing multiple indirect taxes and creating one national market.

2. What are the main benefits derived from GST in India?

Some of the reasons why people say that GST will help India grow include simplification of tax structure; decreased cascading effect of taxes; boosting economic growth; enabling ease of doing business; raised transparency levels; and advantages for MSMEs.

3. What is the strategy behind implementing GST with a view to making it simpler?

GST simplified the taxation system by replacing many indirect taxes with one tax regime that is easy to comply with for businesses and ensures that the laws regarding taxation are uniform to all.

4. How does GST affect the incidence of taxes being passed on?

By allowing businesses to claim an input tax credit (ITC) against the tax paid on inputs, GST removes the cascading effect of taxes leading to a reduction in total taxes paid and prices of goods and services.

5. How does GST change revenue collection for the government?

In general terms, GST has been associated with increased government revenues mostly because of more compliance as well as a wider base though this has had an impact on short-term revenue collections due to initial implementation challenges and adjustments.