Goods and Services Tax (GST): Advantages and Disadvantages

Taxes have been implemented in the society by the human civilization for ages. A number of studies have been conducted regarding the development of taxation in the society since the ancient times. Taxation is beneficial as it is the only way through which the government can provide the basic infrastructure and prosperity to its citizens. The latest development in this regard is the introduction of GST in India. GST is a short acronym for Goods and Services Tax. The GST has been implemented by the government in India. In the present article, an attempt has been made to examine the advantages and disadvantages that are associated with GST.

Before proceeding with the pros and cons of GST, it is important to briefly discuss what GST is. GST can be described as the replacement of all the indirect taxes that are being currently levied by the government on goods and services across the country. In this way, basically GST can be described as direct taxation that will provide a single domain of tax. That is to be levied at the national level. GST is consolidated on the basis of a uniform rate of tax and it has to be paid at the end of the final destination or at the point of consumption. GST will reform the current taxation regime and it will provide for a coalition between the Central and the State Government. GST will provide a basic cooperated linkup among the Indian markets that is expected to provide a boost to the economy.

Let us proceed with the advantages and disadvantages that can be expected by the implementation of GST in India. Among the advantages of GST, the following need to be mentioned:-

1. Simplicity: The existing form of indirect taxes will be replaced by the Goods and Services Tax in the country. GST will provide a substitute for the 17 indirect taxes that are applicable in the nation and will subsidize it with the new GST.

2. Simple Compliance: A widespread IT system will provide the basis for the GST administration in India. As a result, all the taxpayer services like registrations, payments, returns etc. will be available online and as a result, compliance will become simple and apparent.

3. Uniformity of tax rates: The introduction of GST will help in making sure that common traits of indirect taxes and structures are applicable throughout the nation, which will increase certainty and also the simplicity of doing business in the country. In other words, it can be said that GST will help in doing business in country tax neutral, regardless of the choice of place where the business is being done.

4. Elimination of cascading: GST will also help in ensuring minimal cascading of taxes, as it will provide a scheme of flawless tax credits across the value sequence and cross the boundaries of different states of India. This will help in reducing the hidden costs that are associated with doing trade.

5. Improving competitiveness: When there is a decrease in operation expenditure of doing business, eventually it will also result in enhanced competitiveness for trade. It is also believed by the World Bank that implementing the Goods and Services Tax (GST) along with measures like dismantling the interstate check posts, will be the most important reforms that will help in improving competitiveness in the manufacturing sector of India.

6. Benefits for manufacturers and exporters: By merging the major central and state taxes in the GST, comprehensive and complete set off of input goods and services and by phasing out the Central Sales Tax (CST) will result in increasing the cost of goods and services that are locally manufactured. This in turn will help in rising competitiveness of the Indian goods and services in the international markets and at the same time, this step will also give a boost to exports from India. As a result of the uniformity in tax rates and procedures across the nation, there will also be a reduction in compliance cost.

7. Improved powers on tax leak: GST will also help in ensuring improved tax compliance as a result of strong IT infrastructure. Owing to the flawless shift of input tax credit from various stages in the sequence of value accumulation, an inherent apparatus will be present in GST that will provide incentives to the traders in case of tax compliance.

8: Better revenue efficiency: It is also expected that GST will diminish the expenditure of the government incurred in collecting tax revenues and as a result, it will result in improved revenue efficiency.

9: Single and clear tax: As various indirect taxes were charged by centre and state administration, with partial or no input tax credits that were available at different phases of value addition, there are a number of hidden tax is included in the price of the majority of goods in the nation. On the other hand, under the GST, single tax will be charged from the producer to the consumers which will result in transparency of the taxes that are paid by the end consumer.

10. Relief in burden of tax: The credits of input taxes that have been paid at each stage will be available at the later stage of value addition, as a result of which essentially GST becomes a tax only on value addition at each stage. Due to avoidance of leakages and efficiency gains, on most of the goods and services, on the whole tax burden will fall. It will be beneficial for the consumers. In the same way, the final consumer will only have to bear the GST charged by the last dealer and set off benefits will be available at all the earlier stages.

Although a number of advantages associated with GST have been discussed above, but this does not mean that there are no disadvantages of GST. There are certain obvious disadvantages associated with GST that can be discussed as follows:-

1. Higher tax for manufacturing SMEs: The small businesses from the manufacturing segment will have to face the disadvantages of GST realization. According to the earlier excise law, only the manufacturing businesses that have a turnover of more than 1.50 crores had to give excise duty. On the other hand, under the GST, this limit of turnover has been brought down to Rs 20 lakhs. In this way, the tax liability for numerous manufacturing SMEs will be increased.

2. Changes in business software: A large number of businesses are using accounting software or ERPs for the purpose of filing their tax returns and excise, VAT and service tax are already incorporated in the software. However, the implementation of GST will need that changes should be made to the ERPs, which will result in additional cost to purchase the new software and to train the employees.

3. Rise in operating expenses: In case of the majority of small businesses, professionals are not employed and they favor paying their taxes and file their returns on their own in order to save costs. But in case of GST, which is a totally novel tax system, professional assistance will be required by the small businesses also. While such a situation is beneficial for the professionals, small traders will bear the additional cost to hire the experts.

4. Mid-year implementation of GST: The date of implementation of GST is first July, 2017. In this way, in the fiscal year 2017-18, for the first three months, the businesses will have to pursue the old tax structures and for remaining time, they will have to implement the GST. It is not possible to turn from one tax arrangement to other in a single day and therefore the businesses will have to run the tax systems parallel which will cause confusion and issues related with compliance.

5. High taxes may raise prices: At present there are certain sectors like textile where an exemption from taxes is available or they have to pay little tax. On the other hand, the GST has implemented four rates of tax, which is 5%, 12%, 18% and 28%. Therefore in case of several industries, the burden of tax will increase and this in turn may cause an increase in the cost of end product.

6. GST and petroleum products: At present, the petroleum products do not fall under the reach of GST. The States will charge own taxes on petroleum products. Therefore, related industries like the plastic industry cannot avail the tax credit for inputs even if they heavily depend on petroleum products. Similarly, patrol and diesel are also needed to run machinery in the factories and no option to avail input tax credit on these goods will most likely result in increasing the end price of the manufactured goods.

7. Need for registration in different states: GST requires that the businesses will have to register in all states in which they operate. This requirement will certainly add to the compliance burden on the businesses that are operating in a number of states.

8. Problems in e-commerce: These days, a large number of SMEs are operating their business through websites or with the help of third-party sites for the purpose of selling their products in various parts of the nation. The present regime of GST requires that they will have to register in each and every States. Similarly, such businesses will not be eligible for the composition scheme and therefore they will have to pay taxes as other large organizations. Under the GST, e-commerce facilitators have to collect TCS under the GST and this increases difficulties in compliances.

9. Lack of anti-inflationary measures: in case of each country where GST is implemented, a hike in inflation has been experienced when it was first introduced. However, such situation was countered by these countries by keeping tabs on prices and by introducing anti-profiteering measures at the retail level for protecting the consumers from rising prices. While similar discussions took place in the GST Council, still any concrete anti-inflationary measures have not been taken by India to deal with inflation that is the inevitable result of implementing GST.

Change is always difficult; however it will be helpful to take a lesson from the other economies of the world that have already implemented GST. This can help in dealing with the teething problems that have to be faced in order to achieve the advantages of a unified tax system, reduced compliance and easy input credits. It is expected that after the implementation of GST, most of the challenges will be effectively handled. India will become a large single market, which will allow free movement of goods and will result in lesser compliances.