The Goods and Services Tax (GST) is one of India’s most significant tax reforms, combining various indirect taxes previously levied by both the Central and State Governments—such as excise duty, VAT, and service tax—into a single, unified tax system. GST is applicable to the supply of both goods and services across the country.
Like any major reform, GST brings with it a range of advantages and disadvantages. Let’s explore both, starting with the benefits:
✅ Advantages of GST
1. Elimination of the Cascading Tax Effect
GST is designed to consolidate multiple indirect taxes into one system, thereby removing the cascading effect—commonly known as “tax on tax.” This leads to a more transparent tax structure and reduced tax burden on the end consumer.
Let’s understand the cascading effect with a simple example:
Before GST Implementation:
- A service provider charges ₹50,000 for services and adds 15% service tax, amounting to ₹7,500.
- He purchases office supplies worth ₹20,000 and pays 5% VAT, which is ₹1,000.
- Under the old system, he had to pay ₹7,500 in service tax, without any credit for the ₹1,000 VAT paid.
- Total tax outflow = ₹7,500 + ₹1,000 = ₹8,500
Under GST:
- GST on service of ₹50,000 at 18% = ₹9,000
- Input credit on office supplies (₹20,000 @ 5%) = ₹1,000
- Net GST payable = ₹9,000 – ₹1,000 = ₹8,000
Thus, under GST, input tax credit is available, reducing the actual tax burden.
2. Higher Threshold for GST Registration
Under the previous VAT system, businesses with a turnover exceeding ₹5 lakh (this threshold varied by state) were required to register and pay VAT. Additionally, service tax was exempt for service providers with a turnover of less than ₹10 lakh. We can help you with GST registration services!
However, under the GST regime, the registration threshold has been raised to ₹20 lakh, benefiting small traders and service providers by exempting many of them from registration and tax liability. For businesses in northeastern states, this limit is further reduced to ₹10 lakh.
Here’s a comparison of the threshold limits before and after the introduction of GST:
| Tax Type | Threshold Limit |
| Excise Duty | ₹1.5 crores |
| VAT | ₹5 lakh (varies by state) |
| Service Tax | ₹10 lakh |
| GST | ₹20 lakh (₹10 lakh for NE states) |
3. Composition Scheme for Small Businesses
The Composition Scheme under GST is another benefit for small businesses. If a business has a turnover between ₹20 lakh and ₹75 lakh, it can opt for the Composition Scheme, which allows for a simplified tax structure with reduced compliance and tax rates.
This scheme significantly lowers the tax burden and compliance requirements, making it easier for small businesses to manage their taxes and focus on growth.
4. Simple and Convenient Online Process
GST has completely digitized the tax process—from registration to return filing—making it far more convenient than previous systems. This shift to an online platform has been particularly advantageous for startups and small businesses, as they no longer need to visit multiple departments for different registrations like VAT, service tax, or excise.
5. Fewer Compliance Requirements
Under the earlier tax regime, businesses had to comply with multiple tax systems, each having its own return filing process. Here’s how the compliance burden looked before GST:
| Tax Type | Return Filing Frequency |
| Excise | Monthly |
| Service Tax | Quarterly for Proprietorship/PartnershipMonthly for Company/LLP |
| VAT | Varies by state; e.g., Karnataka required monthly returns |
With GST, the number of returns has been streamlined. While there are around 11 types of returns, only 4 are essential for regular taxpayers. This significantly reduces the paperwork and effort required for compliance.
Here’s a quick look at the key GST returns:
- GSTR-1: Filed to report outward supplies (sales) and related invoices for the tax period.
- GSTR-2A & GSTR-2B: Auto-generated returns providing details of inward supplies (purchases) and input tax credit availability.
- GSTR-3B: A summary return to declare tax liability, input tax credit claimed, tax payments made, and any refund details.
By consolidating compliance and simplifying return filing, GST has made tax administration more efficient for businesses of all sizes.
6. Standardized Provisions for E-Commerce Operators
Before the introduction of GST, the e-commerce sector operated under inconsistent VAT rules across different states, which created confusion and compliance challenges.
For instance, platforms like Flipkart or Amazon, while delivering to states like Uttar Pradesh, were required to file VAT declarations and provide vehicle registration details for each shipment. In some cases, if these documents weren’t presented properly, the goods were at risk of being seized by tax authorities.
Additionally, certain states such as Kerala, Rajasthan, and West Bengal viewed these platforms merely as intermediaries, exempting them from VAT registration altogether. This lack of uniformity in treatment made compliance complex for e-commerce companies.
With the implementation of GST, these inconsistencies have been eliminated. GST has introduced clear and uniform rules that apply to all e-commerce operators across the country. These provisions are now standardized nationwide, which simplifies inter-state movement of goods and ensures uniform compliance, regardless of the state in which the supply is made.
This is the first time a tax system has provided such structured and transparent guidelines for the growing e-commerce industry.
7. Enhanced Efficiency in Logistics
Prior to the GST regime, the logistics sector faced significant inefficiencies. To avoid Central Sales Tax (CST) and state entry taxes on goods transported across state borders, businesses were compelled to establish multiple warehouses in various states. These warehouses often operated below capacity, leading to higher operational costs and logistical complexity.
With the implementation of GST, most restrictions on the inter-state movement of goods have been removed. This change has enabled companies to rethink their warehousing strategies.
Now, instead of maintaining smaller, underutilized warehouses in every state, businesses—including e-commerce platforms and logistics providers—are focusing on setting up centralized hubs in strategic locations, such as Nagpur, often referred to as the zero-mile city of India due to its central position.
This consolidation is driving cost efficiency, streamlining supply chains, and significantly reducing logistical expenses—which in turn is helping businesses improve their profit margins and overall performance in goods transportation.
8. Regulation of the Unorganised Sector
Before the introduction of GST, several industries in India—such as textiles and construction—operated in a largely unorganised and unregulated manner. These sectors often lacked transparency, proper documentation, and formal tax compliance.
However, with GST coming into effect, the landscape has changed significantly. The system now mandates online compliance, digital payments, and allows for input tax credit only when the supplier acknowledges and reports the transaction. This mechanism has introduced a higher level of accountability and formalization across these previously unregulated industries.
As a result, sectors that once operated outside the purview of tax laws are now being brought into the formal economy, leading to greater transparency and better tax administration.
Disadvantages of GST
1. Higher Costs Due to Software Requirements
To stay compliant with GST, businesses must regularly monitor legal updates and ensure their accounting or ERP systems are always up to date. This could mean investing in new software or subscribing to a GST compliance solution, both of which incur additional expenses.
Moreover, transitioning to GST systems also demands training staff to effectively use the new software, which adds to the cost and time commitment. While necessary for compliance, these added requirements can put a financial strain on smaller businesses.
2. Penalties for Non-Compliance
Small businesses especially have had to adapt quickly to GST regulations. When GST was introduced, they needed to understand how to issue GST-compliant invoices, keep digital records, and file returns on time.
Missing any of these requirements—such as omitting key details like GSTIN, HSN codes, or place of supply on invoices—could result in penalties or legal complications.
Being fully GST-compliant isn’t just about avoiding fines—it’s essential for smooth business operations and maintaining credibility with clients and suppliers.
3. Rise in Operational Expenses
The introduction of GST significantly changed how taxes are calculated and returns are filed. This shift required many businesses—especially small ones—to hire GST professionals or tax consultants to manage compliance accurately. The added cost of these services led to a rise in operational expenses.
In addition, companies also had to train their staff to understand GST rules, use digital tools, and manage online filings, which added to their overhead costs.
4. Mid-Year Implementation of GST
GST was rolled out on 1st July 2017, right in the middle of the financial year. As a result, businesses operated under the old tax system for the first quarter (April to June) and GST for the remainder of FY 2017–18.
This sudden transition made it challenging for businesses to adjust, with many having to run two tax systems in parallel for a while. This led to confusion, mismatches, and a greater risk of compliance errors during the shift.
5. Transition to a Fully Digital Tax System
Before GST, many businesses managed invoices and filings manually or through basic offline methods. With GST, they had to adopt a fully online system for everything—from invoicing to tax payments and return filing.
For smaller businesses unfamiliar with digital tools, this was a major challenge.
Increased Tax Burden on SMEs
Small and medium-sized enterprises (SMEs), particularly those in the manufacturing sector, have found the transition to GST somewhat challenging. Prior to GST, excise duty was applicable only to businesses with a turnover above ₹1.5 crore. However, under GST, any business earning over ₹20 lakh must register and pay the applicable tax.
While the Composition Scheme offers some relief—allowing businesses with turnover up to ₹75 lakh to pay a reduced 1% tax on turnover with fewer compliances—there’s a trade-off. Businesses opting for this scheme cannot claim Input Tax Credit (ITC). For many SMEs, choosing between a higher tax burden with ITC or a lower tax rate without ITC remains a difficult decision.
Conclusion
Adapting to a major tax reform like GST was never expected to be simple. However, the government has consistently worked towards streamlining GST processes. Looking at global examples where GST has been successfully implemented, it’s clear that initial hurdles eventually lead to long-term benefits—such as a simplified tax structure and better input credit mechanisms.
Over the years, GST in India has made significant progress. The integration of Artificial Intelligence (AI) and Machine Learning (ML) into GST systems has enhanced data analytics, helped prevent revenue leakages, and improved accuracy through auto-populated return forms and stronger validations.
The journey of GST reform is ongoing, and its future looks increasingly efficient and transparent.
FAQs on GST Advantages and Disadvantages
1. Why was GST introduced in India?
GST was introduced to replace multiple indirect taxes like VAT, excise duty, and service tax with a unified tax system. The aim was to simplify tax compliance, reduce cascading taxes, and promote ease of doing business.
2. What is the main benefit of GST for businesses?
One of the biggest advantages of GST is the elimination of the cascading tax effect. It also allows seamless input tax credit and reduces the tax burden on businesses in the long run.
3. What challenges do small businesses face under GST?
SMEs often struggle with increased compliance, adapting to digital invoicing and return filing, and choosing between the regular GST scheme and the Composition Scheme, which restricts ITC claims.
4. What is the GST threshold limit for registration?
Under GST, any business with an annual turnover of more than ₹20 lakh (₹10 lakh in special category states) must register. This is higher than the earlier VAT and service tax limits.
5. Can small businesses opt for a lower tax rate under GST?
Yes, under the Composition Scheme, businesses with turnover up to ₹75 lakh can pay a reduced tax rate (1% for traders, 5% for restaurants, and 6% for service providers) but they cannot claim input tax credit.
6. Is GST filing completely online?
Yes, the entire GST process including registration, return filing, and payments is done online through the GST portal. This promotes transparency and reduces paperwork.
7. How has GST impacted the logistics sector?
GST has improved logistics efficiency by removing restrictions on inter-state movement of goods, leading to the consolidation of warehouses and reduction in transportation costs.
8. Has GST helped regulate the unorganised sector?
Yes, GST has introduced strict compliance and documentation requirements, making it harder for businesses to operate outside the tax net, especially in sectors like construction and textiles.
9. Why do operational costs increase under GST?
Businesses may need to invest in GST-compliant software, train staff, or hire experts, which increases their operational expenses—especially for smaller firms.
10. What should SMEs consider when choosing the Composition Scheme?
They should weigh the benefit of reduced compliance and lower tax rates against the inability to claim input tax credit or make interstate sales.
