Advantages and Disadvantages of GST

GST, or Goods and Services Tax, is a revolutionary tax reform that replaced indirect taxes like VAT, excise duty, and service tax in India. Introduced on 1st July 2017, it follows a multi-stage, destination-based system.

The objective of GST is to simplify the tax structure, reduce corruption, eliminate the cascading effect of taxes, and promote ease of doing business. However, understanding the GST benefits and disadvantages is equally important. Read on to learn about the GST merits and demerits.

Overview of GST

GST is one of India’s most significant tax reforms. It is designed to streamline the indirect tax structure and create a uniform taxation system. It replaces multiple indirect taxes, reducing tax inefficiencies and promoting ease of doing business. One of the primary objectives of GST is to establish a transparent and technology-driven tax system through online registration, return filing, and compliance tracking. The GST Network (GSTN) ensures seamless digital transactions, reducing human intervention, and minimising tax evasion.

A key feature of GST is the input tax credit (ITC), which allows businesses to claim credit for taxes paid on purchases. This eliminates the cascading effect of taxes and reducing the overall tax burden.

GST jurisdiction and tax structure

Indirect taxes replaced by GST

Central government taxes (Now replaced by GST)

• Central sales tax (CST)
• Service tax
• Special additional customs duty
• Countervailing duty (CVD)
• Central excise duty

State government taxes (Now replaced by GST)

• Luxury tax
• State VAT (Value added tax)
• Purchase tax
• Taxes on advertisements
• Octroi duty
• Entry tax
• Tax on lottery, gambling and betting

Advantages of GST

1. Simplified tax structure

Before GST, businesses had to comply with multiple taxes, such as VAT, excise duty, and service tax, each with different rates and filing requirements. This led to higher compliance costs and tax complexities. GST streamlined these taxes into a single, multi-stage, destination-based tax. Under GST 2.0, the tax system is simpler. The reduction in the number of tax slabs has simplified product categorisation for companies, and it's also accessible for consumers to understand.

2. Elimination of the cascading effect

Earlier, taxes were levied on taxes, leading to a cascading effect that increased the overall burden on taxpayers. GST follows the input tax credit (ITC) mechanism, allowing businesses to claim credit for input taxes. This has reduced double taxation and lowered the cost of goods and services.

3. Boost to ‘Make in India’ initiative

GST has provided a favourable environment for domestic manufacturing by eliminating tax barriers and reducing compliance costs. With uniform taxation across states and lower logistics costs, Indian products have become more competitive in global markets, aligning with the government’s ‘Make in India’ initiative. With the implementation of GST 2.0, the effort of the government to promote domestic production has increased as well. Replacing the inverted duty structure arrangement (where the tax on the inputs was higher than that on the output) with a proper one has made manufacturing less expensive.

4. Higher threshold for small businesses

Under the old tax regime, businesses with a turnover above ₹5 lakhs had to pay VAT, increasing their tax burden. GST has raised the exemption limit to ₹40 lakhs for goods and ₹20 lakhs for services, reducing compliance requirements for small businesses and startups. Additionally, the Composition Scheme allows small businesses with a turnover up to ₹1.5 crore to pay tax at a lower rate, further easing their financial burden.

5. Easier compliance with a fully online system

GST has introduced a digital tax system, enabling businesses to register, file returns, and make payments online. This has reduced paperwork, improved efficiency, and increased transparency, making compliance easier, especially for businesses operating in multiple states.

6. Improved logistics efficiency

Previously, inter-state transportation was slowed down due to multiple state-specific taxes and check posts. With GST eliminating border tax collections, businesses now experience faster movement of goods, lower fuel costs, and greater supply chain efficiency, benefiting various industries, such as e-commerce, FMCG, and logistics.

7. Uniform tax rates across India

Earlier, different states had different tax rates, creating uncertainty and administrative burdens for businesses. GST has standardised tax rates, ensuring a consistent and predictable tax system. This has simplified interstate trade and promoted a more business-friendly environment.

8. Regulation of the unorganised sector

Many industries, such as construction and textiles, operated unorganised with minimal tax compliance. GST has brought these sectors under a formal tax structure by requiring proper invoice documentation for tax credits. This has reduced tax evasion, increased government revenue, and created a more transparent business ecosystem.

9. Increased revenue for the government

With better compliance and reduced tax evasion, GST has helped increase government tax collections. The broader tax base and improved tax monitoring system have contributed to higher revenues, enabling more infrastructure development and welfare schemes.

10. Consumer benefits and price reduction

By eliminating hidden taxes, GST has helped lower the prices of many essential goods and services. Additionally, businesses pass on cost savings to consumers, benefiting them in the long run. Among citizens, a greater affordability exists, since lower GST 2.0 rates on all staple items, electronics, and cars have not only made household savings more pronounced but have also increased purchasing power, most notably for middle-class and rural communities.

11. Digital Transparency

There is greater digital transparency in GST 2.0. The use of digital technologies, such as artificial intelligence and big data analytics, now facilitates the detection of tax fraud and at the same time assures higher transparency in the taxpayer–authority relationship.

Disadvantages of GST

1. Increased compliance burden

Though GST simplifies taxation, businesses are required to file multiple returns, including:

• GSTR-1 (monthly/quarterly for outward supplies)
• GSTR-3B (monthly summary for tax liability)
• GSTR-9 (annual return consolidating yearly transactions)

Composition taxpayers are required to file GSTR-4 annually, which is auto-generated. Additionally, GSTR-9 is optional for businesses with a turnover of up to ₹2 crores.

2. Higher tax rates for some sectors

While GST has reduced tax rates for many essential goods, specific sectors like real estate, insurance, and financial services have seen increased tax rates. Example:

• The insurance sector now attracts an 18% GST, which has increased premium costs for consumers.
• Under-construction properties also attract higher GST rates, affecting affordability in the real estate sector.
• Under GST 2.0, luxury buyers will be hit with higher prices. The new 40% slab implies that high-end motor vehicles, motorcycles, and luxury items buyers are going to face heavier taxation.

3. Complex IT system

GST is a fully digital tax system requiring businesses to register, file returns, and claim refunds online. While this improves transparency, it poses challenges for:

• Small businesses and traders with limited digital literacy
• Rural businesses that face internet connectivity issues.
• Companies that need professional accountants and tax consultants, increasing operational costs.

4. Negative impact on some sectors

• Textile and MSME sectors: Initially struggled with higher compliance costs and tax rates
• Handicrafts and unorganised businesses: Found it difficult to transition to the formal tax system.
• Restaurants: Many small eateries shifted out of the Composition Scheme due to increased tax rates and input tax credit ineligibility.

5. Increased operational costs

Businesses had to upgrade their accounting systems to GST-compliant software, train employees, and hire GST professionals. This added financial pressure, especially for small businesses and startups.

6. Exclusion of some items from GST

Despite being a comprehensive tax, GST does not apply to:

• Petroleum products (petrol, diesel, natural gas, crude oil, and aviation turbine fuel)
• Electricity
• Alcohol and liquor for human consumption

Since these items remain under state taxation, businesses still face complex indirect tax structures, defeating the purpose of a unified tax system.

7. Burden on consumers due to higher service tax

Earlier, service tax was 15%, but with GST, many services now attract 18% GST, increasing costs for consumers in sectors like:

• Banking and financial services
• Telecom services
• Hotel and restaurant bills

8. Issues with refunds and working capital

Exporters and businesses relying on input tax credits often experience delays in GST refunds, leading to issues in cash flow. This mainly affects businesses in the manufacturing and export sectors, where working capital is crucial for daily operations.

9. Enterprises are facing transition-related issues

After the implementation of GST 2.0, the majority of enterprises, especially MSMEs, seem to be encountering difficulties in adjusting their accounting systems, grasping new rules, and properly training their employees despite simplification.

10. Short-term discrepancies in pricing have occurred

During the transition period of GST 2.0, consumers might come across anomalies in billing or pricing due to enterprises not yet fully adapted to the new tax rates. Some industries have experienced cuts in Input Tax Credit (ITC) after the introduction of GST 2.0. For example, the elimination of ITC benefits on services such as gyms and hotels may result in a decrease in the profit of these businesses.

11. Classification disputes in GST 2.0

Even though there is a simpler tax structure, there are some product or service item areas that have not been clearly defined, and as a result, implementation may cause conflicts due to these issues.

The advantages and disadvantages of GST highlight that while it has simplified taxation and boosted economic growth, it also presents compliance challenges for businesses. Over time, with refinements in the system, the goods and services tax advantages are expected to outweigh the drawbacks, making it a significant reform in India’s tax structure. As businesses adapt to the digital tax ecosystem, leveraging efficient digital payment solutions like the BHIM Axis Pay UPI App can further simplify transactions and ensure smooth financial operations in the GST framework. Download the app now!

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