Advantages and Dis-advantages of GST

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Advantages and Dis-advantages of GST

Implementation of Goods and Services Tax (GST) was one of the long awaited fiscal reform and
due to various reasons it was only hanging around and could not circumvent the obstacles for
substantially long period of time so much so that people started saying that the reform may not
see a light of the day. However, all that is history now and we are lucky to witness the eventual
implementation of this tax reform and today we stand at a timeline of 200 days post GST
implementation. At this juncture, we need to understand that GST could eventually become a
reality only because of the various advantages it brought along. Of course, no reform can be full
proof and so is GST and therefore the implementation of GST had its own dis-advantages with
few being inherent and intrinsic to the idea of GST, few due to the structure in which it is brought
and a lot being due to the manner in which it is implemented which could have been largely
avoided.

While we take a stock of GST as of today, we need to acknowledge the efforts taken by
government in making it much simpler from the time first model GST code was released in June
2016 to today when we are at the brisk of 200 days post its implementation. While we take a
deeper dive in understanding the advantages and disadvantages of GST, we need to appreciate
the fact that this being a transactional tax its advantages and disadvantages cannot be equated
for all. For instance, it is possible that one sector or industry is largely benefitted due to
implementation of GST while other sector or industry has taken the exactly opposite position.

The point that we need to take home is that many advantages and disadvantages of GST can
be closely understood only when its impact is measured industry or sector wise. For example,
Logistics, Automobile, Construction etc. are few sectors which have been largely benefitted by
implementation of GST whereas Banking, Tourism, North-East Manufacturers etc. are the
sectors which faced a sparely adverse effect. Without divulging into impact of GST and its
advantages/ disadvantages at sector or industry level, this article brings about the general
advantages and disadvantages that are widely applicable to all the sectors, industries and
consumers in common. The list of advantages and disadvantages in GST can be very long, but
herein we look at some of the major ones as explained below:

Advantages under GST:

Boosts Foreign Investment and improves overall investment climate: Tax litigation in
certain high profile cases under income tax act has contributed to a large extent in creating a
very downbeat perception of our country’s taxation system and many allegations were raised
over its certainty. Reluctance to invest was developing due to country’s regulatory and
bureaucratic complexities. In this tax environment, many foreign investors felt it much to better
to shut and go rather than to continue dealing with it. However, GST has given a new hope and
the past bad memories are slowly fading a bit. The mere implementation of GST and the serious
efforts made by government in simplification of GST has developed a strong positive perception
of India’s taxation system world-wide. This is also evident by increasing growth rate of our
economy, increase in FDI’s, stock markets being in consistent boom, Secondary and territory
sectors increased contribution to GDP of the country.

Single assessing authority: One of the important change that businesses will see in the GST
regime is that they need not have to deal with multiple tax authorities. Like in the earlier tax
regime, a person would have to approach multiple tax authorities like Central Excise, VAT,
Service Tax etc. Multiple registrations were required to be taken under each of the laws, returns
were to be filed and assessments, appeals etc. would have to be faced multiple times on the
same business transactions over and over again. In GST, one of the bold steps taken by
government is pruning of tax authorities to one meaning thereby assessee will be either be
registered with the Central tax authorities or with the State tax authorities and not with both, this
shall ease the entire tax assessments and reduce complications that were faced earlier.

Increased certainty/ Reduced litigation: Under earlier indirect tax regime, the main reason for
tax litigation was due to lack of clarity in the law that makes it susceptible to multiple
interpretations, Further, the existence of multiple taxes on the same tax base led to existence of
conflicting opinions from both centre and state tax authorities across the country which has
contributed to multiplicity of litigation. Under GST regime, as majority of the indirect taxes such
as Excise, Service Tax, Value Added Tax (VAT) etc are subsumed and as the tax base of GST
regime is kept very wide with much pruned exemption list, therefore, it will result into a single
streamlined taxation and reduce litigations at large.

Erosion of parallel economy: With some bold reforms like submission of invoice wise
information through electronic mode, fairly lower tax rates, system of compliance ratings being                                                       given to all the businesses, a nation-wide e-way bill system, Concept of auto-matching of
vendor/ customers invoices and seamless flow of input taxes credit etc. could lead to many
businesses voluntarily coming into the tax compliant zone rather than continuing with the ways
and means of tax evasion. The structure of GST is such that non-compliant and unorganized
businesses would find it difficult to survive while the tax compliant businesses will flourish.
Under this scheme of things, GST would help in cutting down the parallel economy to a great
extent.

Reduced corruption: : For the first time in the history of a taxation system of this country, we
have already witnessed that hardly any assesses had to pay bribe to obtain registration under
GST. Now, this the big change that we are immediately seeing which was just not possible for
many in the earlier tax regime. Under the GST regime, the interaction with the tax authorities
would be minimized such that entire flow of communications would happen electronically
through the common portal which would automatically stem way for reduced corruption.

Downslide of prices: Currently, businesses were not able to avail the credits of various taxes
paid. For instance, CST Paid was becoming fully cost, Excise Duty and Service Tax was not
available as credit to traders, VAT was not available as credit to Service providers and various
cesses like SBC etc were only adding to the cost for the businesses. With implementation of
GST, all these cascading of taxes would come down substantially and the thereby prices of
goods/ services should only slide downwards. Further, not just taxes but if transactions are
properly structured and the benefit derived is properly passed on at each levels then the prices
of goods and services can further trim down.

Common national market throughout the country: GST brings in the common market
meaning thereby earlier every state tax law was different and had its own rules, tax rates,
procedures etc. leading to high scope of tax planning and manipulation practices to avoid/
reduce taxes. In many cases, purchasing from inter-state and paying only 2% CST was more
beneficial and in some cases procuring locally even at higher prices with local VAT was more
beneficial which eventually led to high unnecessary purchase planning such as creation of
depots, stock transfers etc. All these planning tools has fall on its foot in the GST regime and
businesses can now plan their purchases purely based on merit of the transaction and a
taxation factor would not have a great influence in procurement decisions to a large extent.

Increase in employment opportunities: After implementation of the new tax regime, the
possibilities of job expansion in the Indian economy has increased as GST is a promising
opportunity. It is learnt that the need for skilled accountants and tax consultants has increased
substantially. The procedural compliances in GST has also given many free-lancers a main
source of occupation. The implementation of GST has increased the jobs in the formal sectors
such as automobiles, logistics, e-commerce, consultancy etc. Further, the software industry has
invested heavily in GST as the tax reform revolves around electronic ways of doing things and
the industry is expected to create large employment opportunities in the GST era.

Dis-advantages:
Not a one nation one tax in spirit: An ideal GST would have been one where only one law
would have been framed and only one authority would have been assigned with the
accountability of framing, governing and regulating the GST law. However, contrary to what was
expected, we presently have 31 legislations governing the entire framework of the law which is
definitely not one nation one tax. In other words, Gujarat GST law is different from the
Maharashtra GST law and if a person is doing business in both the states then he has to take
separate GST registration in both the states, file separate GST returns, maintain multiple state
wise accounts and get the tax assessed by each state authority separately which compromises
the basic structure of the GST that was expected so much so that many experts have started
claiming that this GST is not a tax reform but it is just a old wine in a old bottle with a new label.

Multiple Tax rates: Presently there are 7 standard tax rates and multiple rates of cess provided
for various goods and services which only open the Pandora box of classification disputes and
unnecessary confusion. The nightmare of HSN codes is still prevailing in the industry and trade
with many not having any clarity and following the incorrect coding system. This may lead to
unnecessary issues being faced by businesses at a later date in the form of tax demands with
interests and penalties. A single rate or a dual rate GST system would have been more
appropriate than the present one with varied tax rates.

GST Portal issues: The complete electronic means of reporting transactions in GST is a good
idea but it would have been better if the same is implemented with proper system in place. GST
was implemented without the portal being fully ready and functional with businesses facing
multiple issues in obtaining registrations, cancelling registrations, filing GST returns etc. Even as
the government looks to resolve the glitches of the GST Network, the efforts doesn’t seem any
beneficial as while the old issues get addressed, the new issues crop up. Since, GST in general
demands detailed reporting of transactions through this portal and sub-standard functioning of
the portal is only leading to high time, money and resources being spent by businesses on
unproductive compliances.

Hurried implementation of law:  GST is known as the largest tax reform since independence, it
is seen that government has somehow hurried its implementation, while many business houses
and tax experts warned government of its implementation on 1st of July 2017 and suggested to
implement the same from 1st of October 2017 or a little later but without paying any heed,
government went ahead with its implementation. Resultantly, it is seen that there was confusion
amass among industry, trade, professionals and also government officials. Even today, there
are many aspects of GST which lack clarity. Now, as a damage control mechanism, every time
and again a new notification, press release, circulars, orders, tweets are issued leading to
frequent changes in the law which is only adding to the confusion. This has been one of the
biggest setback and disadvantage which GST has brought that could have been easily avoided
if more patience in its implementation was shown.

Working capital blockage: Working capital is the fuel of every business, it is the money
available for your company’s day-to-day operations, and it reflects the short-term financial
health of the company. Exporters have face the brunt of working capital to the core with refunds
being blocked so much so that even today post 200 days of implementation of GST, exporters
are not able to smoothly claim refunds, same is the position for traders who are not able to claim
the transitional benefit due to non-availability of the required forms on the portal. Further, in
service sector, tax rate will be 18% under GST as compared to 15% under earlier regime
leading to increased blocking of working capital for certain businesses where the credit period is
high.

High compliance burden:  Compliance under GST is very high due to filing of three tax returns
in a month. Not only that if a person is doing business in multiple states then it needs to obtain
multiple registrations for each state and separate GST returns needs to be filed for each state.
This structure of GST has increased compliance burden and it is causing pain mainly for
compliances mainly for small businesses which cannot spend high costs on support functions
such as accounting and taxation etc.

Elimination of local tax incentives/ schemes: In earlier tax regime many investment based
tax incentives were given by central and state governments to make the area business friendly
and encourage investments by virtue of fiscal policies. With implementation of GST, it is seen
that the tax incentives in indirect taxes are no more made available by the governments and the
earlier existing tax incentives have also been discontinued and pruned. This has caused a huge
worry to industries which have set up its business in various states especially in north eastern
states based on various tax incentives promised by the governments. The continuance of such
tax incentives in the GST regime in a new form are not more lucrative and causing high
concerns over viability of such setup.

Disconnect from Foreign Trade Policy: Foreign Trade Policy (FTP) is a beneficial piece of
legislation that provide incentives to various export and import transactions thereby encouraging
foreign trade. Earlier such incentives were also available on Excise duty, service tax, CVD, SAD
paid, however it seen that similar incentives are not continued with IGST. Further, many
schemes and benefits as available to EOU’s, deemed exports, advance license etc. are not fully
linked to the GST regime leading to delinking of FTP with GST. Since, precious foreign currency
brought in the country by the exporters govern the country’s standing in the international market,
any such pruning in the foreign trade policy can only have adverse effect on the economy as a
whole.

Conclusion:

Having discussed various advantages and disadvantages of GST, we need to acknowledge the
government’s efforts in bringing GST and the seriousness that is being shown in simplifying the
same. At this juncture, we need to realize that everything has its pros and cons and taxation
system is no exception to it but those businesses which prepared and planned the transitional
phase of GST well have been able to reap the benefits of advantages and trimmed down the
dis-advantages to the minimum. As the saying goes ‘Success comes to those who acts first’.

– CA Madhukar N Hiregange
–  CA Ravi Kumar Somani

Article was written on 30.12.2017, for any feed or queries write to [email protected] or [email protected])

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