Recognized as one of the nation’s most substantial tax overhauls, the Goods and Services Tax (GST) amalgamates various indirect taxes formerly imposed by both the Central and State governments, including excise duties, VAT, and service tax. This comprehensive tax applies to both goods and services sold within the country.
Every year on July 1st, the country observes GST Day. In light of the transition that transpired on July 1st, 2018, let’s reflect on the one-year journey of GST through the lens of “One Year of GST: A Retrospective.”
However, any transformative measure inevitably brings forth its share of pros and cons. In this discourse, we’ll delve into the benefits and drawbacks of GST:
Advantages of GST
1. Removal of Tax Cascading Effect:
GST serves as an all-encompassing indirect tax system, aiming to consolidate diverse forms of indirect taxation. One of its prime merits is eradicating the “tax on tax” phenomenon, commonly referred to as the cascading effect.
To illustrate, consider the scenario before the GST era:
Pre-GST Era Example:
Suppose a consultant rendered services valued at Rs. 50,000 and levied a 15% service tax (Rs. 7,500). Simultaneously, the consultant purchased office supplies for Rs. 20,000, incurring a 5% VAT (Rs. 1,000).
Under the old system, the consultant couldn’t offset the Rs. 1,000 VAT paid on stationery against the Rs. 7,500 service tax. Consequently, the consultant’s total output was Rs. 8,500.
The GST’s unified structure eliminates this tax stacking, streamlining the taxation process and reducing overall financial burden.
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2. Simplified Taxation Process:
GST replaces multiple layers of indirect taxes with a single point of taxation. This simplifies tax administration, reduces compliance complexities, and fosters greater ease of doing business.
3. Unified National Market:
The integration of multiple state taxes into one nationwide tax structure ensures a uniform market for goods and services across the country. This eliminates inter-state tax disparities, fostering smoother inter-state trade.
4. Enhanced Input Tax Credit:
GST offers businesses the opportunity to claim input tax credit across the supply chain. This boosts transparency, reduces tax evasion, and incentivizes businesses to collaborate with GST-compliant suppliers.
|GST on service of Rs 50,000 @18%||9,000|
|Less: GST on office supplies (Rs 20,000*5%)||1,000|
|Net GST to pay||8,000|
Elevated Entry Bar for Registration
In the previous VAT framework, businesses exceeding a turnover of Rs 5 lakh were subject to VAT payments, albeit with variations depending on the state. Similarly, service providers were exempt from service tax if their turnover remained below Rs 10 lakh.
However, in the realm of GST, a shift has taken place. The threshold for mandatory registration has been elevated to Rs 20 lakh. This change ushers in a scenario where numerous small-scale traders and service providers find themselves exempt from this obligation.
|VAT||5 lakhs in most states|
|Service Tax||10 lakhs|
|GST||20 lakhs (10 lakhs for NE states)|
Drawbacks of GST
1. Elevated Software Costs
The transition to GST compliance entails businesses either upgrading their existing accounting and ERP software or procuring new GST-compatible software. Both pathways contribute to increased expenditure, further compounded by the need for employee training to adeptly navigate the new billing software landscape.
2. Compliance Challenges Leading to Penalties
Navigating the intricacies of the GST tax regime can pose challenges for small and medium-sized enterprises (SMEs). Issuing GST-compliant invoices, adhering to digital record-keeping, and ensuring punctual returns can all culminate in a web of compliance intricacies. These challenges mandate including mandatory invoice details such as GSTIN, place of supply, HSN codes, and other requisites.
3. Rising Operational Expenditures
As GST ushers in a new taxation paradigm, businesses are compelled to onboard tax professionals for effective compliance. For small businesses, this marks an increment in operational costs, stemming from the necessity to secure expert assistance.
Additionally, businesses must allocate resources to train their personnel in the nuances of GST compliance, which further inflates their overheads.
4. Transitional Phase Complexities
GST’s implementation midway through the financial year—on July 1, 2017—resulted in businesses adhering to the traditional tax structure for the initial three months (April, May, and June). The subsequent adoption of GST for the remainder of the financial year led to parallel systems, inducing confusion and compliance dilemmas.
5. Shift to Online Taxation Dynamics
Departing from conventional pen-and-paper invoicing and filing, businesses now transition to online return filing and payment processes. This shift might prove challenging for smaller enterprises, necessitating adaptation to digital taxation dynamics.
Cloud-based GST billing software, like the innovative ClearTax GST Billing Software, offers a solution to this hurdle. The software streamlines return filing by automatically populating return forms using uploaded invoices. It also identifies real-time errors within invoices, thereby amplifying efficiency and accuracy.
6. Enhanced Tax Burden for SMEs
The GST regime poses particular challenges for smaller businesses, especially those in the manufacturing sector. Unlike before, where only businesses with a turnover surpassing Rs 1.5 crore paid excise duty, GST mandates payment for any business with a turnover exceeding Rs 20 lakh.
However, SMEs within the Rs 20 to 75 lakh turnover bracket can choose the Composition scheme, facilitating payment of a mere 1% tax on turnover in lieu of GST, accompanied by fewer compliance responsibilities. A trade-off exists, however; businesses opting for this scheme forfeit the right to claim input tax credit.
Change, as always, comes with its share of complexities. The government’s endeavors to smoothen the GST journey are notable. Emulating the experiences of global economies that pioneered GST showcases the advantages of a unified tax framework, accompanied by streamlined input credits. In the evolving landscape of taxation, acknowledging the initial hurdles as stepping stones to holistic benefits remains imperative.