In India, GST is an acronym for Goods and Services Tax. The Goods and Services Tax is one of India's most notable tax reforms. Nevertheless, the issue of whether implementing this new regime is a wise move or not is still being debated.
Did You Know? Maharashtra recorded the highest state-wise GST collections in September 2022 at ₹21,403 crores. Following it are Karnataka, Gujarat, Haryana, and Tamil Nadu.
What Is Goods and Services Tax?
On 28th February 2006, GST was introduced in the Annual Budget Speech. The project's main aim was to rebuild the indirect taxation system of the nation. The Indian Parliament approved the Goods and Services Tax on 29th March 2017, which came into effect on 1st July 2017.
The idea was to impose a single comprehensive tax on all goods and services. There are four slabs – 5%, 12%, 18%, and 28% – for all types of goods and services. In addition, jewellery, cut diamonds, precious metals, and certain automobiles are taxed at 1.5% and 3%. Overall, there are six slabs.
How Goods and Services Tax Is A New Law?
India imposed GST, or Goods and Services Tax, for several reasons. Among the main reasons for charging GST are:
- Eliminate multiple tax systems
- Getting rid of various taxes on a particular product
- Making online transactions possible
- Filing of returns online
- Reduce tax evasion
- Bringing more and more businesses under the GST
- Increasing consumption of goods and services
- Provide a product at a competitive price
In addition to its merits, this taxation system also has several demerits. A business person, an entrepreneur, or an owner of an MSME must be aware of its advantages and disadvantages.
Advantages of GST
The GST has advantages and disadvantages, just like the two sides of a coin. Understanding GST's advantages and disadvantages are essential for every entrepreneur.
Below are some merits of GST.
1. Eliminates Cascading Tax Effects
GST has the advantage of combining multiple taxes into one. This eliminates the need to pay various taxes on identical products and makes tax processing more fluid. Taking an example from the pre-and post-GST era, let us understand the cascading tax effect.
The table below shows the pre and post-GST era tax calculation. For example, assume a hotel owner charges ₹60,000 for a 5-day stay. Also, he sold a few toiletries for ₹25,000 at the same time.
He will pay a service tax at a 15% rate, i.e., ₹9000 (₹60,000 x 15%).
For toiletries, he must pay VAT at a 5% rate, i.e., ₹1250 (₹25,000 x 5%).
So, the total tax amount = ₹9000 + ₹1250 = ₹10,250.
The GST rate on services is 18%, so the new tax amount is ₹10800 (₹60000×18%). There is a deduction for the tax on toiletries, i.e., ₹8,550 (₹10800 - ₹1250).
Now, the total tax amount is ₹8,550.
2. Enhanced Threshold Limit
Before GST, businesses that crossed the threshold of ₹5 lakh had to pay Value Added Tax. Each state has a different amount. GST increased the point by ₹15 lakhs, making the new limit ₹20 lakhs. SMBs have been greatly relieved by the VAT threshold limit increase.
3. Composition Scheme: Fixed GST rates
To minimise your taxable income, you can opt for the Composition Scheme if you have an annual turnover between ₹20 lakh and₹75 lakh. Suppose you fall within the bracket of turnover mentioned above. In that case, you can pay GST at a fixed rate, irrespective of your income. The Composite Scheme, however, has four primary conditions:
- Businesses dealing in goods are only eligible for the Composite Scheme. Restaurant owners, however, can benefit from the scheme.
- The scheme does not apply to dealers who supply goods across states or e-commerce retailers.
- Dealers cannot collect Input Tax Credits (ITC) and Composite Tax from their clients.
- Rates of Composite Tax are as follows:
-1% for traders
-5% for restaurant owners and
-2% for manufacturers
- The Composite Tax Scheme has eased compliance burdens and reduced tax rates, especially for MSME businesses.
4. Improved Logistics and e-commerce Warehousing
To waive off GST and state entry taxes, logistic firms set up multiple state warehouses before GST implementation. As a result, warehouse inventory was always below optimum capacity because so many products were unavailable.
Thanks to the new GST regime, logistics companies and e-commerce vendors can now establish warehouses at any location that suits their operational needs. These businesses no longer have to pay for unnecessary warehousing costs. Additionally, the GST rule has enhanced the accountability of unorganised sectors such as textiles and construction.
5. Considers e-commerce Operators
There was no explicit definition of e-commerce vendors under any law before GST regulations. In different taxation schemes, they were charged differently. Each state had its provisions for e-commerce companies, confusing these businesses. The VAT on e-commerce companies was not required in states such as Kerala, Rajasthan, and West Bengal since they were treated as mediators. They were treated as VAT-compliant firms in Uttar Pradesh and registered their delivery vehicles for taxation.
It has been possible to declutter all these confusions with the new GST scheme. Several special provisions have been rolled out for e-commerce companies under the GST rules.
Disadvantages of GST
The main aim of these applications is to help taxpayers familiarise themselves with the idea of GST and in turn, ensure that they smoothly transit to the new taxation system.. Despite the above advantages, GST has the following disadvantages.
1. Increased Cost of Operation
Businesses must use GST-compliant or Enterprise Resource Planning (ERP) software to maintain their books and accounting and keep their business afloat. Software such as ERP is costly and requires proper training to run and manage, which increases companies' costs.
Furthermore, compliance with GST norms has significantly increased the operational costs of SMBs, and they have to hire professionals to assist them in complying with them.
2. SMBs' Tax Liability Increases
SMBs are recognised as Small And Midsize Businesses, and Previously, only businesses with revenues over ₹1.5 crores were subject to excise duty. Under the new GST scheme, firms with an annual turnover exceeding ₹40 lakh must pay taxes.
3. Increased Compliance Burden
Each company must register on the GST portal in the state where they operate under the GST scheme. Registering, maintaining documents, invoices, and filing returns are time-consuming. India already faces too many bureaucratic hurdles, so it unnecessarily increases the burden on companies. As a result, most states need to be more technologically savvy, growing companies' compliance hurdles. As a result, new businesses, especially smaller ones, face more significant difficulties.
4. Non-compliance Penalties
GST registration is mandatory for all companies; they will have to pay penalties if they do not register. GST is quite complex for MSMEs, so they may need to know its nuances. They will either hire a professional or look for help online. SMBs can still benefit from free GST-compliant digital invoices from many online platforms.
5. IT Expenditure
Due to the GST regime, all corporations should replace their current accounting software program or ERP software program to make it GST compliant or buy new GST software to support their organizations.
Despite being designed to resolve the issues of earlier systems, new systems also have flaws. GST has been experiencing this in its early years of implementation. It is always challenging to roll out recent changes in a country like India, which is diverse and cluttered with bureaucracy. However, changes are inevitable, and the government is making timely changes to simplify the GST rules. If we want to compete, we must adjust our playing style to match that of the global economy.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.