Advantages
Simplified Tax Structure
GST replaces multiple indirect taxes like VAT, excise duty, service tax, etc., with a single unified tax, simplifying the taxation process.
Reduced Tax Evasion
The transparent and technology-driven nature of GST reduces the scope for tax evasion as each transaction is recorded and tracked.
Elimination of Cascading Effect
GST eliminates the cascading effect of taxes, where taxes are charged on taxes, by allowing businesses to claim input tax credit on the taxes paid at the previous stage.
Improved Efficiency
GST streamlines the supply chain and distribution system by removing entry tax barriers between states, leading to faster movement of goods and reduced transportation costs.
Promotion of Make in India
GST encourages domestic manufacturing by making exports competitive and reducing the tax burden on manufacturers.
Broader Tax Base
GST brings more businesses under the tax net, reducing the scope of black money generation and increasing government revenue.
Uniform Tax Rates
It brings uniformity in tax rates across the country, promoting ease of doing business and reducing complexities for businesses operating in multiple states.
Higher Compliance
The digitalized tax payment and return filing system makes it easier for businesses to comply with tax regulations, leading to increased tax collections.
Boost to Economic Growth GST can contribute to economic growth by promoting investment, manufacturing, and consumption due to its simplified and unified tax structure.
Encouragement of Formal Economy
GST encourages businesses to operate within the formal economy to avail input tax credits, thereby reducing the size of the informal or black economy.
Global Competitiveness
The unified tax regime makes goods and services more competitive in the global market, benefiting exports and reducing trade barriers.
Efficient Supply Chain
With reduced inter-state barriers, logistics and supply chain management become more efficient, leading to cost savings for businesses.
Disadvantages
Initial Implementation Challenges
The transition from the previous tax system to GST initially led to confusion, technical glitches, and compliance issues for businesses.
Complexity in Classification
Determining the correct tax rate for certain products and services can be complex, leading to disputes and potential litigation.
Technology Infrastructure Requirement
Many small businesses faced challenges in adopting the digital platforms required for GST compliance, especially in rural areas.
Impact on Small Businesses
Small businesses with turnover below a certain threshold might find compliance procedures burdensome, affecting their operations.
Potential Price Increases
While the intention is to have a revenue-neutral impact, some goods and services may become costlier due to higher GST rates compared to the earlier tax regime.
Burden on Service Sector
Service providers often face a higher tax rate under GST, impacting their profitability.
Multiple Returns Filing
Businesses need to file multiple returns, which can be time-consuming and complex, especially for businesses operating in multiple states.
Delayed Input Tax Credit
Delays in input tax credit refunds can lead to working capital blockage for businesses.
Unpredictable Revenue for States
States may face revenue uncertainty during the initial implementation phase, affecting their budget planning.
Possibility of Rate Manipulation
Frequent changes in tax rates can lead to confusion and encourage tax avoidance strategies.
Impact on Inflation
During the transition phase, the introduction of GST can lead to price fluctuations and inflation due to changes in tax rates and supply chain disruptions.
Administrative and Compliance Costs
Businesses need to invest in technology, personnel, and training to comply with the new GST regulations, leading to increased operational costs.
Risk of Tax Evasion in Reverse Charge Mechanism
In cases where the recipient of goods or services is liable to pay GST (reverse charge), there’s a potential for tax evasion if proper checks are not in place.
Classification Challenges for Mixed Supplies
Determining the correct tax treatment for goods or services that are bundled together (mixed supplies) can be complex and prone to interpretation issues.
Increased Complexity for Real Estate Transactions
The real estate sector has specific challenges with GST, such as determining whether a transaction qualifies as under-construction or ready-to-move property, leading to confusion.
Impact on Unorganized Sector
Small businesses in the unorganized sector might find it challenging to adapt to the formal economy due to compliance requirements, impacting their competitiveness.
IT Infrastructure Reliability
The successful implementation of GST relies heavily on a robust and reliable IT infrastructure for online tax filing and processing, which can sometimes face technical issues.
Transition for Service Providers
Service providers accustomed to a service tax regime might face challenges in adapting to GST, especially when dealing with input tax credit and multiple rate structures.
State-Specific Challenges
States with different economic structures and revenue needs might face varying challenges in adopting GST and aligning with a common tax structure.
Anti-Profiteering Measures
To prevent businesses from not passing on the benefits of input tax credit to consumers, anti-profiteering measures are in place, but implementing them effectively can be complex.
Also read: GST – Advantages & Disadvantages
Conclusion
The initial challenges and complexities in implementation can lead to confusion and operational disruptions. The impact on inflation, especially during the transition period, needs to be carefully managed. Small businesses and the unorganized sector might face difficulties adapting to the formal economy due to compliance requirements. The classification of goods and services, as well as determining the correct tax treatment for specific scenarios, can be complex and subject to interpretation.
