Goods and Services Tax: The Pros and Cons

India is the second largest consumer market in the world. There are over a billion consumers, and companies from all over the world are making inroads into this developing nation to get a piece of the action.

The Indian growth story has been remarkable and resilient. It has been resilient because the growth has happened despite the unfavorable business atmosphere in the nation. Companies have always found it difficult to cope with the incredibly complex and harrowing taxation system that India had put into place.

However, on the midnight of 30th June 2017, India woke up to a new tax regime. From 1st July 2017, the various taxes that were levied by different state and local authorities were scrapped. A new system was created, the result of which was a unified tax system that would work all across the nation. The principle followed during the implementation was “One nation, One market, One tax

This was no less than a historic moment. This is because various Indian governments have been involved in a massive parliamentary debate for over 15 years on this issue of GST. Finally, the system has seen the light of day.

Whether this system has been the game changer that it has always been touted to be is yet to be seen. Hence, for the moment, we will focus only on its widely debated pros and cons.

The Advantages of GST are as Follows:

  • Harmonized Procedures: Tax compliance is a major cost to the companies operating in India. Not only do companies have to pay taxes, but they also have to present the data in a certain format and file the returns. In a system where there are several taxes to be paid, several formats have to be followed. Companies had to hire experts in every kind of tax to ensure compliance. Also, the software systems and tax engines that they used for invoicing were based on extremely complex algorithms. This made the cost of compliance and reporting extremely high. Indian companies were spending a lot of money to be tax complaint and this was apart from paying taxes! This was making companies less competitive in the foreign markets. Because of this extremely complex taxation system, it would sometimes make more sense for companies to import the products even though they could have been sourced indigenously.

  • Reduced Corruption: The GST has been designed to be a major blow to corruption. Every time goods had to come into local areas for sale, they were taxed by local bodies. Once again the tax rates here were not the entire problem. These taxation points often lead to huge queues and even traffic snarls outside major cities. The corrupt officials would needlessly delay the trucks from entering the city with their red-tapism. Tired of waiting at check points, the logistic companies would usually resort to bribing the officials in order to save time and therefore money. Multiple taxes meant multiple officers had to be bribed. By implementing a one tax system, the Indian government has significantly reduced the corruption prevalent in the economy.

  • No Dual Taxation: The Indian tax system was complicated. First excise had to be paid for the manufacture of goods. Then VAT had to be paid for the sale of goods. Also, if the sale involved interstate transport then central sales tax had to be paid. Finally Octroi had to paid to bring the goods in local area for sale. The weird part about this was that sellers could not claim input credit for the other taxes paid. Hence, the final consumer had to pay double or even triple tax on the products. GST has made this ambit of taxes redundant. As a result, the consumers now are no longer subject to dual taxation.

  • Reduced Black Money: India has almost fought a war on black money when Prime Minister Narendra Modi ordered demonetization in November 2016. GST is a continuation of that strategy. With the decline in corruption and compliance costs, businesses are finding it much easier to operate in the country.

Disadvantages of GST

  • Choppy Implementation: The biggest disadvantage of GST is that it has been implemented in a hurry. Due to extremely short duration given by the government to implement the changes, the software industry had to work day and night. Still the systems are not functioning seamlessly. However, companies are working as fast as they can to get their systems up and running. The government should have taken into account that companies today run on complex ERP systems which cannot be changed overnight as per the whims and fancies of the government. Smaller traders in particulars are having a hard time dealing with the new tax regime. However, the government has loosened compliance norms for the first two quarters to provide time for the business to adjust.

  • Revenue Positive: Also, it is likely that GST will be revenue positive. This means that it will take more money from the public’s pockets and put it into the government’s coffers. This will make the economy even more dependent on fiscal spending. This is not a good sign. Most developed economies have more reliance on free market spending than they have on government spending.

To sum it up, GST is also an imperfect policy. However, the degree of imperfection is much less as compared to that of the previous policies. As time passes by, the people of India should be able to adjust much better with this policy. It is likely that GST will be a game changer in the long run.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.