In this blog, we will explore the top 10 disadvantages of GST in India, highlighting the issues that must be addressed for a smooth transition and wider acceptance across the country. The Goods and Services Tax (GST) introduced in India in 2017 was designed to simplify the tax system and create a unified market. However, despite its benefits, implementing GST has thrown up several challenges. From the compliance burden to its impact on small businesses and the unorganized sector, many have faced difficulties adopting the new system.
What is the GST?
The Goods and Services Tax (GST) is a comprehensive, multi-stage, destination-based tax levied on the supply of goods and services in India. It was introduced on July 1, 2017, under the One Nation, One Tax framework, replacing indirect taxes such as VAT, excise duty, and service tax.
1. Single tax structure: Several indirect taxes have been merged.
2. Destination-based taxes: The tax is collected not at the place of origin but at the place of consumption.
3. Multi-stage taxation: Levied at each stage of production and distribution, but the input tax credit is also given to prevent the wide spread of tax.
4. Dual GST Model: Divided into:
CGST (Central Goods and Services Tax): Revenue for the Central Government.
SGST/UTGST (State/Union Territory GST): Revenue for state governments or union territories.
IGST (Integrated Goods and Services Tax): Applicable on inter-state transactions and imports.
What are the Top 10 Disadvantages Of GST in India?
1. Compliance Burden
2. Increased Costs
3. Increased Software Expenses
4. Strict GST Regime
5. Tax Burden for SMEs
6. No GST Charged on Petroleum Products
7. Complicated Tax System
8. High Tax Liability
9. Higher Tax Burden
10. Impact on the Unorganised Sector
To Filing GST Contact Our Expert Legal Adviser
1. Compliance Burden
Compliance burden increases due to GST, as returns such as GSTR-1, GSTR-3B, and annual returns are filed repeatedly, leading to 37 filings per year per GSTIN. Businesses must upload invoices in real time for input tax credit (ITC), wherein ITC is denied in case of discrepancy.
Small businesses face additional costs for software and training, while non-compliance attracts fines. Sectors like e-commerce face additional challenges, such as tax collection at source (TCS).
2. Increased Costs
Increased Costs Under GST
The increase in the cost of GST implementation is due to the following reasons:
1. Technology upgradation: Investment in GST-compliant software.
2. Professional fees: Dependence on accountants and tax consultants.
3. Employee training: Training of employees on GST compliance.
4. Compliance costs: Frequent return filing and audits.
5. Transition costs: Change from old tax systems to GST.
3. Increased Software Expenses
Businesses, especially small and medium enterprises, must invest in GST-compliant software to manage invoices, returns, and compliance. This increases operational costs, including periodic updates and maintenance, which can be cumbersome for smaller organizations.
Let me know if you want to add this point to the list or expand it further!
4. Strict GST Regime
A strict GST regime refers to stringent policies, rules, and enforcement mechanisms under the Goods and Services Tax (GST) framework to ensure compliance, reduce tax evasion, and enhance revenue collection.
1. Mandatory e-invoicing: Ensures transparency in large transactions.
2. Real-time monitoring: Monitors transactions through the GSTN portal.
3. ITC Restrictions: Input tax credit will be given only if the suppliers file returns.
4. Penalties: Heavy penalties for non-compliance or tax evasion.
5. E-way bill blocking: Non-filing of returns restricts the movement of goods.
5. Tax Burden for SMEs
India’s small and medium enterprises (SMEs) often face unique challenges when implementing the Goods and Services Tax (GST). Here’s how GST affects SMEs and the resulting tax burden.
1. Compliance costs: SMEs have to incur additional costs for accountants, software, and tax filings.
2. Cash flow problems: Delay in input tax credit puts pressure on working capital.
3. Increased documentation: SMEs are required to maintain detailed records, which increases the administrative burden.
4. ITC Restrictions: Restrictions on claiming input tax credits reduce the expected profits.
5. Various tax slabs: Complex tax slabs lead to confusion and possible errors in classification.
6. No GST Charged on Petroleum Products
Yes, petroleum products are currently outside the scope of GST in India. This means that they are not taxed under the GST system, but are taxed under the old system of State VAT and Central Excise. This includes the following products.
1. Revenue concerns: Petroleum products contribute significantly to the revenue of both the state and the Centre, and bringing them under GST may hamper the revenue generation of the governments.
2. Price volatility: The prices of petroleum products are volatile and are affected by international markets. Including them in GST may lead to price fluctuations which may be difficult to manage.
3. Political sensitivity: An increase in prices of petroleum products due to GST may lead to public outrage and political repercussions, as these products are widely consumed.
7. Complicated Tax System
The complex tax system under GST arises from multiple tax slabs (0%, 5%, 12%, 18%, 28%), dual GST (CGST, SGST, IGST), and regular filing requirements. Businesses, especially small businesses, face challenges in classifying goods, understanding the evolving rules, and complying with the tax structure. Input tax credit restrictions and inconsistent taxation on goods add to the confusion, making the system difficult to navigate and increasing compliance costs.
8. High Tax Liability
Higher tax liability under GST can arise due to several factors.
1. Cascading Effect: Businesses may face higher liability during the
2. GST transition if they cannot claim Input Tax Credit (ITC) on pre-GST stock.
3. High Tax Rates: Goods and services in higher tax slabs (18% or 28%) lead to increased liability.
4. Delayed ITC: Delays in receiving ITC can temporarily increase the tax burden.
5. Restricted ITC: Some expenses aren’t eligible for ITC, raising effective tax costs.
6. E-commerce TCS: Tax Collected at Source (TCS) increases compliance costs for online sellers.
7. Incorrect Classification: Misclassifying goods/services into higher tax slabs can lead to additional tax liability.
8. Increased Compliance Costs: Frequent returns and documentation add to administrative expenses.
9. Higher Tax Burden
The higher tax burden under GST could increase costs for consumers and businesses. The primary reasons include:
1. Increased prices: Some goods and services, previously tax-free or taxed at lower rates, now fall under higher GST slabs, leading to higher prices.
2. Passing on costs to consumers: Businesses can pass on the burden of higher taxes to consumers, increasing the overall cost.
3. Tax on exempted goods: Goods and services previously exempted are taxed, increasing the cost.
10. Impact on the Unorganised Sector
Impact of GST on the unorganized sector.
1. Increased compliance: Small businesses have difficulty filing and record keeping.
2. High costs: Upgrading systems and hiring staff adds financial strain.
3. Pressure to formalize: Unregistered businesses risk being excluded from the market.
4. Cash flow problems: Delayed input tax credit impacts liquidity.
5. Confusion: It is difficult for small traders to understand the difference between various tax slabs.
6. Competitive Disadvantage: The organized sector has an edge in compliance.
7. Limited input credit: Lack of proper records limits tax benefits.
8. Informal workers affected: Pay changes affect informal workers.
Conclusion:
GST has streamlined India’s tax system to a great extent, but its implementation has not been devoid of challenges. Disadvantages such as increased compliance burden, higher operational costs, and difficulties faced by the unorganized sector highlight the complexities of transitioning to a unified tax structure. Small businesses and informal sectors face challenges related to compliance, competitiveness, and understanding tax structures. Despite these shortcomings, with continued refinement and simplification, GST has the potential to benefit the economy in the long run. However, it is essential to overcome its disadvantages to ensure a smooth transition and wider acceptance across all sectors.
FAQs
Q1. What are the disadvantages of GST in India?
The disadvantages of GST in India include increased compliance burdens, high operational costs, and confusion over multiple tax slabs, which make it difficult for small businesses to adapt. Delays in input tax credits can affect cash flow, while small, unorganized businesses face pressure to formalize operations.
Q2. Why did GST fail in India?
GST in India faced challenges that hindered its smooth implementation. The complex tax structure with multiple slabs and frequent changes created confusion. Small businesses struggled with the compliance burden, and the unorganized sector had difficulty adapting.
Q3. What are the problems with GST?
The main problems associated with GST in India include complex compliance requirements, which increase the burden on businesses, especially small businesses. Multiple tax slabs create confusion, and businesses face higher operating costs due to the need for a new accounting system. Small businesses also face cash flow problems due to delays in GST registration and input tax credits.
Q4. How to claim a GST refund?
To claim a GST refund, log in to the GST portal and file all the required returns (GSTR-1, GSTR-3B). Then, apply for a refund by selecting the appropriate type (e.g., payment of additional tax or export of goods/services) and filling out Form GST RFD-01. Submit the required documents such as tax payment receipts and invoices.
Q5. Which 17 taxes merged in GST?
The 17 taxes subsumed in GST include central excise duty, service tax, VAT, central sales tax (CST), excise duty on goods, customs duty (for imports), entry tax, luxury tax, state sales tax, octroi, purchase tax, entertainment tax, tax on advertisement, tax on lottery, gambling tax, betting tax and various cess and surcharges.
Add a Comment