Advantages and Disadvantages of GST – How It Changed Taxation in India

GST brought many of India’s indirect taxes under a common tax framework. It made tax administration more technology-driven and introduced Input Tax Credit (ITC) across the supply chain. At the same time, businesses may face challenges related to compliance, technology and cash flow.

So, what are the advantages and disadvantages of GST, and how does the system affect businesses and consumers?

What Is GST?

Goods and Services Tax (GST) is an indirect tax levied on the supply of goods and services in India. It was introduced on 1 July 2017 and replaced several central and state-level indirect taxes.

GST is a destination-based tax, which generally means that the tax revenue goes to the jurisdiction where the goods or services are consumed rather than where they are produced.

Depending on the transaction, GST can broadly take the following forms:

• CGST: Central Goods and Services Tax collected by the Central Government on intra-state supplies.
• SGST: State Goods and Services Tax collected by the State Government on intra-state supplies.
• UTGST: Union Territory Goods and Services Tax applicable to eligible intra-UT supplies.
• IGST: Integrated Goods and Services Tax generally applicable to inter-state supplies and imports.

What Are the Current GST Rate Slabs?

The current GST structure mainly includes 0%, 5%, 18%, and 40%, with special rates applicable to certain products such as gold, silver, and rough diamonds.

Features of GST

GST allows eligible Input Tax Credit, supports online compliance, follows multiple tax rates and applies turnover-based registration rules.

• Destination-Based Tax: GST follows the destination principle, so tax revenue generally goes to the place where goods or services are consumed. For inter-state supplies, IGST generally applies.
• Input Tax Credit: Eligible businesses can claim credit for GST paid on qualifying business purchases and adjust it against their GST liability, subject to applicable conditions. This helps reduce the cascading effect of taxes.
• Technology-Based System: GST registration, return filing, tax payments and other compliance processes are handled electronically, creating digital transaction records and reducing physical paperwork.
• Multiple Tax Slabs: GST does not have a single rate for all goods and services. Different supplies may attract rates such as 5%, 12%, 18% and 28%, along with exemptions, depending on their classification.
• Registration Thresholds: GST provides turnover-based registration exemptions for eligible businesses. The applicable threshold depends on factors such as the nature of supply, state and other registration conditions. Under the CGST framework, the threshold can extend up to ₹40 lakh for eligible suppliers exclusively supplying goods, while different limits and conditions can apply to services and special-category states.
• Composition Scheme: Eligible small taxpayers can opt for the Composition Scheme, which offers simplified compliance and tax payment rules. For eligible suppliers of goods, the turnover limit is generally ₹1.5 crore, with a lower ₹75 lakh limit in specified states. A separate scheme is available to eligible service suppliers with turnover up to ₹50 lakh.

Uses of GST

GST is used to collect indirect taxes, regulate taxable transactions, facilitate inter-state taxation, verify tax records and settle tax revenues between the Centre and states.

• Tax the final consumption of goods and services: GST applies to eligible supplies at different stages, with the tax burden ultimately linked to consumption.
• Facilitate inter-state transactions: IGST provides the mechanism for collecting and settling tax on supplies made between states.
• Maintain a common tax record: GST creates transaction records that can be used for tax reporting, verification and compliance.
• Support tax collection: GST provides a structured mechanism for collecting indirect tax on eligible supplies.
• Track taxable transactions: GST invoices and digital records help tax authorities trace transactions across the supply chain.
• Enable tax reconciliation: Businesses can compare purchase and sales information with reported GST data while determining their tax liability.
• Bring businesses into the tax system: GST registration and reporting requirements help identify businesses involved in taxable activities.
• Facilitate Centre-State tax sharing: GST provides a framework for distributing and settling tax collected under CGST, SGST and IGST.

What are the Advantages of GST?

The major advantages of GST come from bringing several indirect taxes under a more integrated framework, allowing eligible Input Tax Credit and digitising tax administration.

Here are the key GST advantages in detail.

• Reduces the Cascading Effect of Taxes: Eligible Input Tax Credit helps prevent tax paid at one stage from becoming part of the taxable cost at subsequent stages.
• Simplifies Tax Administration: Bringing several indirect taxes under one framework can make tax administration more organised for businesses dealing with different types of transactions.
• Improves Business Operations Across States: A common tax framework can make it easier for businesses with operations in multiple states to manage their indirect tax requirements.
• Encourages Better Record-Keeping: GST encourages businesses to maintain proper invoices, transaction records and supporting documents for their tax activities.
• Supports Greater Tax Compliance: Digital records and transaction reporting can make taxable activities more traceable and encourage businesses to follow prescribed tax requirements.
• Helps Businesses Manage Tax Costs: Eligible businesses can use Input Tax Credit to adjust qualifying input taxes against their output tax liability, subject to GST rules.
• Makes Tax Charges More Transparent: GST invoices clearly show the tax charged on a transaction, giving businesses and consumers greater visibility into the tax component.
• Supports Formal Business Practices: GST registration, invoicing and reporting requirements can encourage businesses to maintain more organised financial and tax records.

What are the Disadvantages of GST?

Despite its benefits, there are also several disadvantages of GST in India. These primarily relate to compliance, technology requirements, cash-flow management and the complexity of certain GST rules.

• Compliance Can Be Complex: Registered businesses may need to maintain detailed invoices and records and file applicable GST returns within prescribed timelines. Small businesses without an internal finance team may need additional accounting or professional support for return filing, ITC reconciliation and classification.
• ITC Can Create Reconciliation Challenges: Input Tax Credit is subject to conditions under GST law. Supplier-reported invoices also feed into the recipient’s GSTR-2B, so discrepancies or delayed reporting can create reconciliation issues for buyers.
• GST Requires Digital Compliance: GST relies heavily on online systems for registration, return filing and other compliance processes. Smaller businesses may need accounting software, reliable internet access and trained employees or professional support.
• Multiple GST Rates Can Create Complexity: India has different GST slabs rather than a single rate for all goods and services. Businesses need to identify the correct classification and applicable rate, and errors can lead to incorrect invoicing or compliance issues.
• Compliance Can Increase Administrative Costs: Businesses may need to spend on GST-compatible accounting systems, bookkeeping and professional tax assistance. These additional costs can be more noticeable for micro and small businesses.
• Late Filing Can Attract Additional Costs: Businesses must meet applicable return-filing and tax-payment deadlines. Delayed compliance can result in late fees, interest or other consequences under GST rules. Businesses required to file nil returns must also meet the applicable filing requirements.
• Some Major Items Remain Outside GST: Not every item in India falls under GST. Certain petroleum products remain outside GST until they are brought within its levy, while electricity duty is also outside the normal GST credit chain. This means GST does not provide a completely seamless indirect-tax credit chain across every sector.

Advantages and Disadvantages of GST at a Glance

Here is a simple comparison of the pros and cons of GST:

Is GST Good or Bad?

GST can be considered both beneficial and challenging, depending on the business, transaction and compliance requirements involved. It has brought greater consistency to indirect taxation, but businesses still need to manage multiple tax rates, reporting requirements and other GST rules.

• For businesses: The impact depends on factors such as turnover, industry, eligibility for Input Tax Credit and the complexity of their transactions.
• For consumers: GST makes the tax component more visible on invoices, but its effect on prices varies across goods and services.
• Overall: GST is neither entirely good nor bad. Its impact depends on how its tax structure and compliance requirements apply to a particular situation.

Advantages and Disadvantages of GST : FAQs