The GST system of taxation is gradually gaining some maturity after countless amendments and changes. While people are still confused about things like the GST amnesty scheme, the composition scheme, etc there is growing consensus about how it is good for the nation. See more. However, for many situations it may not be so advantageous:
Additional Software Expense
Most businesses rely on accounting software or some ERP, which needs to be upgraded or replaced with a new one. It would cost an additional expense to the businesses. When all systems would change, there will be a need to train the staff on those systems.
Higher Tax Rate
As per the draft GST model law released by the government, the proposed GST is expected to sustain at about 27% in India, which is higher than most of the other countries having GST. Some of them are 1% in Hong Kong and 17% in Singapore. The rate can go higher as more taxes are getting merged into it.
GST is a multi-stage, destination-based tax which means there will be a lot of paperwork involved. It will require more than one return to be filed each month by a taxpayer. There are certain documents (like invoices) that have to be kept by the businesses for at least 3 years. This may increase the work pressure of your employees.
One of the biggest disadvantages of GST in India is inflation. As GST is a destination-based tax, it will increase the overall price of goods and services because all taxes (central and state taxes) are included in the price of products. A company has to pay its output tax along with its input tax before selling a product/service to customers. The final cost of products may increase due to this reason which will result in inflation in India. This is also one of the most prominent disadvantages of GST that people often complain about.
Additional Investment In Infrastructure
Your existing infrastructure may not be enough to handle GST compliances. You may need to invest in additional infrastructure, manpower, etc. This will result in additional investment on your part.
Additional Working Capital Requirement
You need to pay taxes on purchases even before receiving payment from customers. This results in the additional working capital requirement, which can increase your overall business cost.
Tax Credit Restriction
GST implementation may create some confusion, due to which your vendors may not provide you with a proper tax invoice, making it difficult for you to claim input credit. This can affect the cash flow of your business in the short run.
A Complex System
GST is expected to be a unified tax system, where various taxes will be merged into one single tax. However, it has multiple components as well, such as CGST, SGST, and IGST. This makes GST a complex system that can be difficult to understand and implement. Moreover, different rules are applicable for the sale and purchase of goods or services within the state or outside the state. Also, different rates of taxes will apply to different products, making it more difficult to calculate GST. Not only that, there will be certain products that could fall under both exempt and taxable categories as well. Hence, a complex classification of goods and services may lead to confusion regarding the correct rate of GST on a product or service.