GST Benefits – Advantages and Disadvantages of GST

Hailed as one of the biggest tax reforms in India, the Goods and Services Tax (GST) subsumes many indirect taxes imposed by both the Centre and the States—such as excise duty, VAT, and service tax—into one unified system. It is levied on the sale of goods and services across the country. Like any major reform, GST comes with its own advantages and disadvantages. Let’s explore these in detail with practical examples.

Advantages of GST

1. Eliminates the Cascading Effect of Tax

GST has been designed to remove the “tax on tax” issue prevalent in earlier systems.

Example: A consultant charges Rs.50,000 for services. Under the old regime, a 15% service tax would add Rs.7,500. If the consultant then purchases office supplies for Rs.20,000 and pays 5% VAT (Rs.1,000), there was no mechanism to adjust the VAT against the service tax, resulting in a total outflow of Rs.8,500. With GST, an 18% tax on Rs.50,000 amounts to Rs.9,000, but an input tax credit of Rs.1,000 (from the office supplies) reduces the net GST payable to Rs.8,000.

2. Higher Registration Thresholds

GST has raised the turnover limits for mandatory registration, reducing compliance for many smaller businesses.

Before GST:
– VAT registration: Businesses with a turnover as low as Rs.5 lakh (varied by state).
– Service tax: Providers with turnover below Rs.10 lakh were exempt.
Under GST:
A uniform threshold of Rs.20 lakh is applied (Rs.10 lakh for some North-Eastern states).

Tax Type	Threshold Limit (Before GST)	Threshold Limit (Under GST)
Excise	–	1.5 crores
VAT	5 lakhs (in most states)	20 lakhs (10 lakhs for NE states)
Service Tax	10 lakhs	–

3. Composition Scheme for Small Businesses

Small enterprises can opt for the Composition Scheme under GST to ease compliance and reduce tax liability. For most traders and manufacturers, the scheme is available if the aggregate turnover is up to Rs.1.5 crore. However, for service providers and restaurants (excluding those serving alcohol), the threshold is typically lower—around Rs.75 lakh. For instance, a local retailer with an annual turnover of Rs.1.2 crore can choose this scheme to benefit from a lower fixed tax rate and reduced compliance obligations, although they cannot claim input tax credits.

4. Simple and Easy Online Procedure

The entire GST process—from registration to filing returns—is conducted online. A start-up, for example, no longer needs to manage separate registrations for VAT, excise duty, and service tax. Instead, all processes are handled via a single online portal, saving time and reducing administrative hassle.

5. Reduced Number of Compliances

Under the previous system, businesses had to file separate returns for excise, service tax, and VAT, each with its own deadlines. Now, about 11 consolidated returns are required, including 4 basic returns (GSTR-1, GSTR-2A/2B, and GSTR-3B), which greatly simplifies compliance.

6. Special Provisions for E-Commerce Operators

E-commerce companies previously had to deal with different VAT rules across states. Now, GST standardizes these provisions, ensuring smooth inter-state movement of goods. For example, an online retailer delivering to multiple states no longer needs to file separate VAT declarations.

7. Improved Efficiency of Logistics

Logistics companies benefit from GST by easing inter-state movement restrictions. Companies can now operate from centrally located warehouses—such as in Nagpur—to serve larger regions efficiently, reducing overall transportation and storage costs.

8. Regulation of the Unorganized Sector

Industries like construction and textiles, which were once largely unregulated, are now brought under the GST framework. For example, a textile manufacturer must maintain detailed digital records and invoices, leading to improved accountability and a more organized tax collection process.

Disadvantages of GST

1. Increased Costs Due to Software Purchases

Businesses need to regularly update or purchase GST-compliant accounting software or ERP systems. For instance, a medium-sized enterprise may have to invest in new software and train employees, resulting in increased initial costs.

2. Penalties for Non-Compliance

Adjusting to new GST-compliant invoicing standards—which include mandatory details such as GSTIN, HSN codes, and place of supply—requires significant effort. A business issuing non-compliant invoices might face hefty penalties during tax audits if errors are detected.

3. Rise in Operational Costs

To navigate the complexities of GST, many businesses have had to hire tax professionals or consultants. For example, a small company might incur additional expenses by employing a dedicated tax expert or outsourcing GST return filing.

4. Mid-Year Implementation Challenges

GST was introduced on July 1, 2017, forcing companies to operate under two tax regimes in the same financial year. A business had to reconcile transactions from April to June (under the old system) separately from those processed under GST after July, leading to confusion and compliance issues.

5. Adapting to a Complete Online Taxation System

Switching from traditional paper-based invoicing and filing to an entirely online system has been a steep learning curve for some. For instance, a small business owner accustomed to manual processes may struggle with online return filing and digital payments.

6. Higher Tax Burden for SMEs

While the Composition Scheme offers relief for some, many SMEs now face GST liabilities even with relatively low turnovers. For example, a small manufacturer that previously did not need to pay excise duty (if below Rs.1.5 crore turnover) must now comply with GST once turnover exceeds Rs.20 lakh. Even if they opt for the Composition Scheme (paying a fixed percentage on turnover), they forgo the benefit of input tax credits.

Conclusion

Change is never easy, and the GST transition is no exception. This reform has unified India’s indirect tax structure by streamlining input tax credits, online procedures, and standardizing rules across sectors like e-commerce and logistics. However, challenges remain—especially for small and medium-sized businesses adapting to new compliance requirements, increased operational costs, and mid-year transitions.

As GST continues to evolve with technological advancements, its efficiency is expected to improve further. At DisyTax, we are dedicated to guiding your business through these changes, ensuring you remain compliant while maximizing the benefits of this transformative tax reform.