1 July 2017 turned out to be the most revolutionary day in the 160-year history of tax in India, as Prime Minister Narendra Modi launched GST into operation.
GST is without a doubt, a revolutionary step. It demolished the long-practiced cascading of taxes and replaced it with one uniform tax.
However, the story simply does not end here! As soon as the government implemented GST, this sudden, hasty decision invited criticism from economic experts and the opposition. Some reprimanded the new tax system for its untimely implementation; some criticized it for its likely adverse effects on the economy.
And three years down the line, we’re still on the fence as to whether GST is beneficial or not.
We’ll leave the final verdict to you as we delve into the key advantages and disadvantages of GST for businesses.
What is GST?
Simply put, it’s an indirect tax levied on the supply of goods and services for domestic consumption in India. GST is a destination-based, multi-staged comprehensive tax comprising all indirect taxes.
Though the concept of GST might seem apparent on the surface, it’s a bit complicated. The consumers pay the GST. And companies in the services and manufacturing sectors remit it to the government. Therefore, companies with an annual sales turnover over the prescribed threshold need to be registered under GST.
GST in India is classified into three categories:
- State Goods and Services Tax (SGST)
- Central Goods and Services Tax (CGST)
- Integrated Goods and Services Tax (IGST)
The GST rate in India is further categorized into four slabs: 5%, 12%, 18%, and 28%, depending upon the type of goods and services supplied.
All in all, when businesses charge for their goods or services, they need to charge GST separately. They need to issue a tax invoice demonstrating the price of supplies and the amount of GST charged.
For Business, is GST a boon or a bane?
Well, there are both pros and cons, and let’s discuss them in detail.
The Benefits of GST for Businesses
The benefits of GST are evident for the government and consumers. After GST, India has witnessed a significant growth of 7.9% in GVA in the manufacturing space. But there are a few takeaways for businesses, too. Let’s delve into the advantages of GST.
Elimination of the Cascading Effect
Slumping of taxes was a major hurdle in the pre-GST era, not only for consumers but also for business. With GST in place, the final tax would be levied only on the goods and services purchased.
For businesses, this helps bring transparency. Since the amount of GST to be imposed on each type of good or service is already predefined, companies can conduct business under scrupulous taxation practices.
A Single Layer of Taxation
Before GST, different tax lines like Service Tax, Central Excise, Sales Tax, etc. existed. Not only was this a burden for consumers, but it complicated the invoice management process and tax calculation for businesses, too. Now, with one consolidated tax in place, there’s no need for the imposition of multiple tax layers.
Improved Logistics Productivity
Earlier, businesses had to face strict restrictions on the interstate movement of goods. To avoid this, they had to maintain multiple warehouses across the country to ensure the timely delivery of products. GST had reduced these interstate restrictions, allowing businesses to conduct business across states easily.
Ease of Doing Business
GST has reduced complexities in tax and invoice management. Before GST, businesses faced problems regarding the registration of VAT and dealing with tax authorities. The new taxation system has simplified the taxation process and enabled companies to do business with ease.
Relief for Small Businesses
The previous VAT structure dictated that a business with a turnover of INR 5 lakh or more is liable to pay VAT. Whereas, companies with a turnover of over INR 10 lakh will pay Service Tax.
The GST structure has a threshold of INR 20 lakhs for most states and INR 10 lakhs for NE states. Thus, small businesses and service providers are now relieved.
Simplified Registration Procedure
The entire GST process, ranging from registration to filing, is done online. Business owners no longer need to wait in long queues and run from office to office to get their name on paper.
Disadvantages of GST for Businesses
Many experts believe that GST implementation was hasty and has played a detrimental role in the country’s economy. Though the long-term effects are yet to be seen, let’s look at a few visible drawbacks of GST for businesses.
Higher Tax Burden on Small Businesses
Before GST, only the businesses with a turnover of INR 1.5 crore had to pay excise duty. The GST has alleviated this number to INR 20 lakh, which has increased the tax burden on small traders and service providers.
Although the process of GST registration is entirely online, it can be cumbersome. Businesses need to register themselves under GST in all states in which they operate. This increases the administrative burden and compliance issues for businesses.
Increased Operational Costs
Since GST has completely refurbished the taxation system, businesses need to employ expert tax professionals to manage their GST returns. The increased costs of tax management are turning out to be a significant burden on small businesses.
Need for Technology Upgrade
GST was implemented in the middle of the year, making it difficult for businesses to adapt to the new system. Besides, most companies had already implemented invoicing software solutions before GST came into play. Thus, they had to invest in new, GST-compliant accounting systems, which increased operational expenses.
Uniformity in Taxation
The GST rates are different for various types of goods and services. Only a 5% tax is levied on services like tailoring and newspaper printing, which is a relief for businesses. But contrarily, a whopping 28% GST is levied on IT, cinema, and hotel services, which can affect the ease of doing business.
GST has changed the way business is conducted. Small companies are now a part of the formal economy. Additionally, the simple registration and filing of GST have brought relief to small business owners.
But there are some pitfalls, too. As the implementation was sudden, businesses had no time to adjust and adapt. Plus, they had to deploy a new taxation system, which increased operational burden and costs.
In all, GST might be complicated for new businesses, but you can avail its benefit if you have the right solutions in place.
Therefore, it’s critical to utilize GST invoicing software solutions like Moon Invoice for smooth, GST-compliant business operations.