GST is a unified, destination based indirect tax. Such a tax is imposed on the value added to goods as well as services at each stage of the supply chain. The purpose behind implementing GST is to create a unified market in the country. So, a host of taxes are subsumed and the tax compliance is reduced to achieve such a purpose.Thus, 17 Centre and State levies such as excise duty, service tax, VAT, Central Sales Tax etc. are consolidated.
Needless to say, GST is certainly one of the path breaking tax reforms of India. In fact, the interim finance minister Mr. Piyush Goyal was positive about GST revenue collection during the Interim Budget 2019. He said that the GST revenues have been upbeat. This was despite the major GST rate reductions.
For instance, the total gross GST revenue collected in the month of January, 2019 is Rs 1,02,503 crore. Now, this is the third time that GST Revenue collection has crossed one lakh crore mark in financial year 2018-2019. In addition to this, the total number of GSTR 3B Returns filed for the month of December up to 31st January, 2019 is 73.3lakh.
You May Also Read
However, GST came with its share of downsides despite the above benefits. There are certain disadvantages of GST that make this tax challenging to implement. So let’s have a look at the Pre GST era against the current scenario before delving deep into advantages of GST in this article.
Meet Abeer, a Cycle Manufacturer Based In Punjab
Abeer has a cycle manufacturing unit in Punjab. He’s been in this business from the past 25 years. He has experienced both the Pre and Post GST times. Where Abeer had to deal with multiple taxes and their compliances prior to GST, he is now pays only one tax. Let’s understand how taxation scene has changed for his manufacturing unit in Punjab.
When Abeer had to deliver goods to Raxo Bicycles, a dealer in Maharashtra, following were the taxes levied under the previous indirect tax system:
- Central Excise was levied on manufacture by the Centre
- The Punjab Government levied VAT/CST on the sale of bicycles
- Entry Tax was collected by Maharashtra Government on the entry of goods into Maharashtra
- Octroi was collected by BMC.
Now if you try to understand this, same set of bicycles have been charged for Central Excise, VAT, Central Sales Tax, Entry Tax and Octroi at different points. Thus, such a tax structure escalated the cost. Also, the credit of Central Excise paid on manufacture of bicycles could not be claimed either against VAT or Service Tax.
However, with the coming of GST, Abeer’s manufacturing unit simply pays 12% GST on bicycles manufactured and sold to dealers. Say if the cycle costs Rs. 2500, it pays GST @12%. It further adds the cost of accessories such as lock, stand, carrier and bell which makes the final price to be Rs. 3100.
Given this in the backdrop, let’s understand in detail the advantages and disadvantages of GST.
Advantages of GST
1. Upcoming of Common National Market
Under the Pre – GST scenario, state and local self governments practiced notable sovereignty in taxation. With individual states having strong taxation rights, each used to levy indirect taxes such as VAT, Central Sales Tax, Service Tax, Excise etc in many different forms. Not only that, to attract investment in their respective states, state governments depended on incentives. This leads to different prices of the same goods and services in different states. While states benefited from such a tax structure, the economy as a whole suffered.
But with the coming of GST, the registered tax assessees now pay a single, uniform tax on goods and services across the country. In addition to this, GST is lead by a Central Tax Authority – the GST Council. This council is chaired by the Union Finance Minister and has various states as its members. Each state member thus participates in the formulation of the indirect tax policy of the country.
2. Elimination of Cascading Effect of Taxes
Cascading tax effect, also known as tax on tax, occurs when a good is taxed on every stage of its production, until it is sold to the final consumer. In such a situation, each succeeding transfer of good is taxed inclusive of the taxes charged on the preceding transfer. Consequently, the final consumer bears the burden of multiple taxes imposed on every stage of production, leading to inflationary prices. To better understand the tax on tax effect, let’s reconsider the above example.
First Stage – When Abeer, the Manufacturer in Punjab, Sells to a Dealer in Maharashtra
Abeer collects Excise Duty (charged on selling price) as well as Central Sales Tax (charged on cost plus Excise Duty) from the dealer in Maharashtra. Therefore, the final price paid by the Maharashtra dealer to Abeer is:
Final Price = Cost Price + Excise% on Cost Price + CST% on (Cost Price + Excise% on Cost Price)
Note: When goods are sold intra state (within the same state), VAT is charged. However, if the goods are sold to a different state ( say from Punjab to Maharashtra), Central Sales Tax is charged. VAT was collected by the respective state governments. Whereas, CST was collected by the Central Government prior to GST. Excise duty was collected on manufacture of goods. Since Abeer is a manufacturer and has sold goods to Maharashtra dealer, he collects excise as well as CST from Maharashtra dealer.
First Stage – When Abeer, the Manufacturer in Punjab, Sells to a Dealer in Maharashtra
Say Raxo Bicycles, the Maharashtra dealer, sells to the final consumer in Maharashtra. In this case, Raxo would take cost price of Abeer plus excise duty paid to him as his cost. Further he will add its margin to this price. And finally, collect VAT% on this price. This would look like the following:
Raxo’s Cost = Cost price of Abeer + Excise Duty Paid
Raxo’s Selling Price = Raxo’s Cost + Margin in Rs
VAT Amount = VAT% on (Raxo’s Cost + Margin in Rs)
Final Invoice Price for Consumer = Raxo’s Cost + Margin in Rs + VAT% on (Raxo’s Cost + Margin in Rs)
Now if you look carefully, excise duty is included in the cost of Maharashtra dealer, on which VAT is charged. This means the end consumer has to pay tax on tax, and thereby increased price for the good. Also, unlike GST, Maharashtra dealer could not claim input credit of excise duty paid on inputs. The previous indirect tax regime did not allow for cross utilization of input taxes between goods and services. This meant that taxes paid on input goods could not be used to set off output tax paid on services and vice – a – versa. In addition to this, setoff facility for different Centre and State levies was also not available, thus leading to inflationary prices for end consumer.
3. Increased Exemption Limit for Small traders or Service Providers
Under the previous indirect tax structure, various indirect taxes had different sales turnover limits for registrations.
Annual Sales Turnover Limits for Indirect Taxes Under Previous Tax Regime
The threshold limits for registrations under various indirect taxes was as follows:
Excise Duty – Manufacturers with an annual turnover of Rs. 1.50 Crores and above were required to register for excise duty and hence liable to pay excise tax.
Service Tax – Service providers with an annual sales turnover of Rs. 10 lakhs and above were required to register for service tax and hence liable to pay the same.
Value Added Tax – This varied for different states.
Annual Sales Turnover Limits for Indirect Taxes Under GST
The turnover limits for registration under GST are higher, which exempt the small traders and service providers from paying GST. In fact, in the 32nd GST Council Meeting, the turnover limits for GST registration were further increased. Hence, with the grant of such GST exemptions and benefits, 35 Lakh small traders, manufacturers and service providers are expected to be benefited.
According to 32nd GST Council Meeting:
- For suppliers of goods, the GST exemption limit increased from Rs 20 Lakh to Rs 40 Lakh
- GST exemption limit for supplier of services remains unchanged at Rs. 20 lakhs
- And for special category states, the GST exemption limit increased from Rs. 10 lakhs to Rs. 20 lakhs
Note: Hilly and north eastern states have been given an option to choose either Rs. 20 lakhs or Rs. 40 lakhs as the turnover limit for GST exemption.
4. Small Businesses Benefit from the Composition Scheme
To encourage reduced taxes and tax compliances, the Composition Scheme was introduced under GST. Small business owners registered under the scheme are required to pay a fixed percentage of tax on their turnover. In addition to this, unlike the regular GST tax payers, small businesses registered under Composition Scheme need to file one quarterly return. Following are the tax rates under Composition Scheme:
- Small businesses with a turnover of Rs 1.50 crores would pay a flat GST rate of 1%. They will now file one tax return only.
- Small service providers with an annual turnover of Rs 50 Lakhs would now pay a GST of 6% instead of 18%.
You May Also Read
5. Reduced Tax Compliances as Number of Tax Returns to be Filed Under GST Has Come Down
Since a host of taxes existed under the previous indirect tax structure, the businesses registered for various indirect taxes had to bear multiple compliances.
Snapshot of the Return Filing Scenario That Existed Prior to GST
Excise Return – Monthly/Quarterly depending on the scale of business unit (Large business, EOU or SSI)
Service Tax – Half yearly return
Value Added Tax – Monthly/Quarterly depending on the State that is responsible to collect VAT.
Return Filing Under GST
In order to simplify the return filing under GST, the GST Council has been making continuous effort to further reduce the compliances. As per the ongoing GST return filing system, businesses are required to file an interim summary return in Form GSTR 3B. Such a return enables the taxpayers to report their total tax liabilities and avail tax credits. No invoice level information was required for this form.
But, taxpayers still have to go through an unnerving experience with regards to online compliance for GST Returns. Therefore, to simplify the tax returns further, the GST Council approved a new return design in its 27th Meeting.
Under the new procedure to file GST returns,
- The taxpayers would have to file only one monthly return. This return will contain two tables. One for reporting outward supplies. And one for availing input tax credit based on invoices uploaded by the supplier.
- Moreover, the proposed structure would allow the suppliers to upload the invoices on real time basis. Such invoices can be viewed and locked by the buyer for availing input tax credit. And reconciliation of invoices with that of buyers would take place offline.
6. Registration and Filing Returns Under GST Made Simple as Everything is Done Online
Be it GST registration or return filing, a registered business owner can do everything online. This is certainly opposed to the earlier indirect tax regime, where a business owner had to get himself registered separately for various indirect taxes.
7. Regulated Unorganized Businesses
One of the motivations to implement GST was to get on board the unorganized sector and eventually increase the tax base. According to Economic Survey 2017 – 2018, post the implementation of GST, there has been a 50% increase in the number of indirect tax payers. Furthermore, there has been an increase in the number of voluntary registrations, especially small enterprises that sell goods to large enterprises. These small entreprises want to come under the ambit of GST and claim input tax credit benefit.