TOPIC: MERITS AND DEMERITS OF GST

INTRODUCTION

The Goods and Services Tax is regarded to be one of the most noteworthy tax reforms in
India. Regardless, the debate on whether the implementation of this new regime is a wise
decision or not is still ongoing. The Goods and Services Tax (GST) is a unified,
consumption-based tax levied by the Government on the supply of goods and services. The
GST combines all stages of indirect tax such as manufacture, sale, and domestic
consumption of goods and services. GST operates at a national level to put an end to
multiple taxes like central sales tax, VAT, service tax, CST, sales tax, etc. which are levied
on different products & services.

It functions at a national level in order to replace most of the national and state tax systems
like VAT, service tax, excise duty, etc. It removes the cascading effect of distorted tax
structure. GST is applicable if an individual is involved in manufacturing, e-commerce,
trading, or offering services, and their annual turnover exceeds a prescribed limit.
MEANING OF GST

GST, an acronym for Goods and Services Tax, stands as a transformative indirect tax
system in India, effectively replacing numerous pre-existing levies such as excise duty, VAT,
and services tax. Enacted by the Parliament on 29th March 2017, GST took effect from 1
July 2017. This tax framework operates as a comprehensive, multi-stage, and destination-
based system, applicable to the supply of both goods and services. Emphasizing value
addition at each stage, GST serves as a unified domestic indirect tax law across the entire
nation. The implementation of GST marked a significant shift from the previous complex
structure of indirect tax in India, streamlining and unifying the taxation system for enhanced
efficiency and transparency.

Multi-stage Supply Chain -

Within a multi-stage supply chain, a product undergoes diverse transactions, traversing from
raw material procurement to the eventual sale to the end consumer. This journey
encompasses stages such as:

 Raw material acquisition

 Manufacturing
 Warehousing
 Wholesale distribution
 Retail sales
 Selling to end consumers.

The Goods and Services Tax (GST) is intricately integrated into each stage of this supply
chain, establishing it as a multi-stage tax. The tax is applied at every juncture as the product
progresses through the supply chain.

Value Addition in GST

At each stage, value is incrementally added to the product. For instance, a biscuit
manufacturer adds value during the production process, and subsequent entities, such as

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warehousing agents and retailers, contribute to this value through packaging, labelling, and
marketing. GST is levied on these successive value additions, reflecting the monetary
increase at each stage leading to the final sale to the end customer.

Destination-Based Tax

GST operates on a destination-based principle. For instance, if goods are manufactured in

Maharashtra but consumed by the end customer in Karnataka, the tax revenue generated by
GST is allocated to Karnataka, the point of consumption. This ensures that the tax revenue
aligns with the location of consumption, adding a destination-based dimension to the GST
system.

When Was Introduced GST in India?

GST was introduced in India on 1 July 2017 after the Parliament passed the Goods and
Service Tax Act on 29 March 2017.

Why Was Introduced GST in India?

Before the introduction of GST, the taxation system in India lent itself to various problems.
GST Registration Process was introduced to provide relief from these problems. GST:

 Subsumed majority of the indirect taxes

 Removed the cascading effect of taxes
 Stopped evasion of taxes
 Increased taxpayer base
 Provided online procedures to increase the ease of doing business
 Made the distribution system and logistics better
 Promoted consumption and competitive pricing.

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Drawbacks in Pre-GST Regime

Multiple value-added taxes like Central Excise Duty and State-Level VAT created
roadblocks in the entire manufacturing and production process of goods and services in India.
Small businesses especially faced following multiple difficulties due to the deficiencies in the
earlier regime:

1. No Integration of taxes - There was no integration of VAT on goods (State levy) with the
tax on services/ manufacture (Central levy), which led to double taxation on the manufacturer
and producer.

2. No distinction - The earlier tax regime did not differentiate between the characteristic
nature of manufacturing goods and rendered services. Certain transactions were subject to
double taxation and were taxed as both goods and services under the earlier regime.

3. Litigation formalities - There was a huge amount of legal issues due to various tax
disputes regarding credit availed, and classification of goods, etc.

4. Origin based tax - The pre-GST regime of indirect tax was an origin-based tax. Taxes
were collected and utilised by the State from where the goods and services originated. This
encouraged the States to provide sales tax/VAT relief to attract industries and at the same
time discourage the supply of goods from another State by imposing entry tax, octroi, luxury
tax etc., on goods coming from other States.

5. Multiplicity of taxes at State Level - Several taxes at the State and local levels, such as
Luxury Tax, Entertainment Tax, etc., were not included in the State VAT. Hence one had to
pay multiple taxes for a single transaction.

6. Multiple compliances - Multiple compliance needed to be met by taxpayers in the

previous tax structure which was time-consuming and required a lot of effort.

7. Cascading effect of Central Taxes - There was CST (Central Sales Tax) imposition on
every footing in addition to State taxes. This resulted in double taxation, leading to a
cascading effect on consumer prices. Central sales tax was not creditable, thereby adding to
the cost of the goods. Goods were taxed at every production stage, leading to a piling effect
on the final pricing of goods and services.

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8. Barriers - India had barriers in national as well as in the international markets. There were
multiple taxes like Central State tax, VAT, entry taxes, custom duties etc. Even individual
States collected an additional tax at State borders.

9. No cross utilisation - There was no cross utilisation of taxes available in the pre-GST era.
For example - The Central Sales Tax was not available for set off with VAT.

MERITS OF GST –
Following are the various advantages of GST implementation in India –

Eliminates multiple layers of taxation:

The primary benefit of GST Registration is that it integrates different tax structures like Sales
Tax, Central Excise, Special Additional Duty of Customs, Service Tax, Luxury Tax, etc. into
a unified tax. It abolishes multiple layers of tax levied on goods and services.

Removes cascading effects:

Under the current GST regime, the final tax is to be paid by the consumer over purchase of
goods and services. However, there is an input tax credit structure in place to ensure the
cascading effect that was evident previously is eliminated. GST is imposed only on the value
of goods or services.

Creates a common national market:

With the introduction of GST, there has been a significant rise in India’s tax to Gross
Domestic Product ratio that helps promote economic efficiency in the long-run. The
comprehensive tax leads to uniformity among different sectors concerning ‘tax on tax’. It
eradicates economic distortion and forms a common national market.

Ease of doing business:

With online GST processes, from registration to return filing, indirect tax compliance has
been reduced. This is one of the key benefits of GST that assists companies to carry out their
business operations with ease. The major benefit of GST registration for start-ups is that they
do not have to get involved in different registrations like VAT, Service tax, excise, etc.

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Boosts productivity of logistics:

Pre GST administration, the logistics industry in India had to maintain various warehouses
across states to ensure current CST and state entry taxes are avoided on interstate
movements. As a GST outcome, reduced logistics costs have led to an increase in business
revenue involved in the supply of goods via transportation.

Regulates unorganized sector under GST:

With transparent GST mechanism, unorganized sectors can be efficiently regulated. Some
particular industries in India like textile and construction are highly unorganized and
unregulated. With provision of online compliances and payments, the GST system has
become more accountable.

Tackles corruption and tax leakages:

With the online facility to directly register, file returns, and make payments of taxes online,
the whole tax mechanism has become transparent. The online system keeps a strict check on
frauds and evasion without having to interact with tax authorities. The shift from traditional
GST practices to online modes help build a corruption-free tax administration and is a key
merit of GST Registration.

DEMERITS OF GST –
While much of the benefits of GST have been listed above, there are a few drawbacks or
demerits of GST Registration that companies must know. Let us take a look at problems
imposed by this tax reform:

Increases costs due to software purchase:

Businesses are required to update their existing accounting software to GST software to
continue business operations & be GST compliant. This leads to increased cost of software
purchase and training company personnel to efficiently utilize the new billing software.

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Higher Tax Burden of SMEs:

Earlier Small and Medium Enterprises were required to pay excise duty only on a turnover
exceeding INR 1.5 Crore every financial year. At present, businesses with a turnover
exceeding INR 40 Lacs are liable to pay GST under the GST administration.

Increase Burden of Compliance:

The new GST regime states that companies have to mandatorily get GST registered in all the
states they operate their businesses in. This leads to an unnecessary burden on businesses for
tedious paperwork processes and compliance.

No GST charged on petroleum products:

The GST Council excludes petrol and petroleum products under its administration. These
products attract other taxes such as central excise duty and value added tax (VAT) levied by
states.

GST is an online taxation system:

From GST Registration to filing GST returns, the Government has made online provision for
GST. While businesses are gradually accelerating digital solutions, small companies are not
well-versed with evolving and advanced technologies and solutions. It can be challenging for
many businesses to adopt a GST structure.

GST was implemented in the middle of the financial year:

As GST came into effect on July 1, 2017, businesses followed the old GST regime for a few
months. Businesses may find it hard to adjust to the new GST structure, and some of them
are operational following tax systems in parallel, leading to compliance issues.

IT Infrastructure:

Being an IT-driven system, GST requires businesses to adopt well-equipped infrastructure

and modern tax technology. The e-governance model has been implemented by only a few
states as many businesses need to upgrade their IT infrastructure. A lot of states use the
manual VAT returns system in their business operations that list for a major demerit of GST.

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 CONCLUSION

The Government has introduced a GST system to smoothen tax processes and bring
businesses into the formal economy. Being GST-compliant, businesses can experience the
merits of having a unified tax system and easy input credits. Stakeholders welcome GST
implementation as a new change as it helps boost the economy. Even though GST serves as a
historical tax reform in India, there are several downsides that make this tax challenging to
implement.