- Advantages of GST
- GST eliminates the cascading effect of tax
- Higher threshold for registration
- Composition scheme for small businesses
- Simple and easy online procedure
- The number of compliances is lesser
- Special treatment for e-Commerce operators
- Improved efficiency of logistics
- Unorganised sector is regulated under GST
- Disadvantages of GST
- Conclusion
- Quick Summary
GST Benefits – Advantages and Disadvantages of GST
Hailed as one of the biggest tax reforms of the country, the Goods and Services Tax (GST) subsumes many indirect taxes which were imposed by Centre and State such as excise, VAT, and service tax. It is levied on both goods and services sold in the country.
Any reform is bound to have advantages and disadvantages. In this article, we will talk about both the advantages and disadvantages of GST:
Let us look at the advantages to start with:
Advantages of GST
GST eliminates the cascading effect of tax
GST is a comprehensive indirect tax that was designed to bring indirect taxation under one umbrella. More importantly, it is going to eliminate the cascading effect of tax that was evident earlier.
Cascading tax effect can be best described as ‘Tax on Tax’. Let us take this example to understand what is Tax on Tax:
Before GST regime
A consultant offering services for say, Rs.50,000 and charged a service tax of 15%
(Rs.50,000 * 15% = Rs.7,500).
Then say, he would buy office supplies for Rs.20,000 paying 5% as VAT
(Rs.20,000 *5% = Rs.1,000).
He had to pay Rs.7,500 output service tax without getting any deduction of Rs.1,000 VAT already paid on stationery.
His total outflow is Rs.8,500.
Under GST
GST on service of Rs.50,000 @18% | 9,000 |
Less: GST on office supplies (Rs 20,000*5%) | 1,000 |
Net GST to pay | 8,000 |
Higher threshold for registration
Earlier, in the VAT structure, any business with a turnover of more than Rs.5 lakh (in most states) was liable to pay VAT. Please note that this limit differed state-wise. Also, service tax was exempted for service providers with a turnover of less than Rs.10 lakh.
Under GST regime, however, this threshold has been increased to Rs.20 lakh, which exempts many small traders and service providers.
Let us look at this table below:
Tax | Threshold Limits |
Excise | 1.5 crores |
VAT | 5 lakhs in most states |
Service Tax | 10 lakhs |
GST | 20 lakhs (10 lakhs for NE states) |
Composition scheme for small businesses
Under GST, small businesses (with a turnover of Rs.20 to 75 lakh) can benefit as it gives an option to lower taxes by utilising the Composition scheme. This move has brought down the tax and compliance burden on many small businesses.
Simple and easy online procedure
The entire process of GST (from GST registration to filing returns) is made online, and it is super simple. This has been beneficial for start-ups especially, as they do not have to run from pillar to post to get different registrations such as VAT, excise, and service tax.
Our Clear GST software helps you with filing of accurate GST returns ahead of due dates.
The number of compliances is lesser
Earlier, there was VAT and service tax, each of which had its own returns and compliances. Below table shows the same:
Tax | Return Filing |
Excise | Monthly |
Service Tax | Proprietorship / Partnership – Quarterly Company / LLP – Monthly |
VAT | Is different for different states Some states require monthly returns over a threshold limit. Some states like Karnataka require a Monthly return |
Under GST, however, there are fewer returns to be filed. Therefore, the number of returns to be filed has come down. There are about 11 returns under GST, out of which 4 are basic returns that apply to all regular taxable persons under GST. The main GSTR-1 is filed to report list of sales invoice and related documents for the tax period.
The next return is GSTR-2A and GSTR-2B that are dynamic and static auto-drafted returns with input tax credit details reported as available or not for a taxpayers during the tax period. The summary return in form GSTR-3B contains both sales and ITC information, any refund details as well as details of non-GST supplies for the tax period. This return is filed to report the taxes payable, ITC claimed and taxes paid for the tax period.
Special treatment for e-Commerce operators
Before GST regime, supplying goods through the e-commerce sector did not have separate rules. It had variable VAT laws. Let us look at this example:
Online websites (like Flipkart and Amazon) delivering to Uttar Pradesh had to file a VAT declaration and mention the registration number of the delivery truck. Tax authorities could sometimes seize goods if the documents were not produced.
Again, these e-commerce brands were treated as facilitators or mediators by states like Kerala, Rajasthan, and West Bengal which did not require them to register for VAT.
All these differential treatments and confusing compliances have been removed under GST. For the first time, GST has clearly mapped out the common provisions applicable to the e-commerce sector across India and since these are applicable all over India, there should be no complication regarding the inter-state movement of goods anymore.
Read a more detailed analysis of the impact of GST on e-commerce.
Improved efficiency of logistics
Earlier, the logistics industry in India had to maintain multiple warehouses across states to avoid the Central Sales Tax and state entry taxes on inter-state movement. These warehouses were forced to operate below their capacity, giving room for increased operating costs.
Under GST, however, these restrictions on inter-state movement of goods have been lessened.
As an outcome of GST, warehouse operators and e-commerce aggregators players have shown interest in setting up their warehouses at strategic locations such as Nagpur (which is the zero-mile city of India), instead of every other city on their delivery route.
Reduction in unnecessary logistics costs is already increasing profits for businesses involved in the supply of goods through transportation.
Visit here to read more about the impact of GST on logistics.
Unorganised sector is regulated under GST
In the pre-GST era, it was often seen that certain industries in India like construction and textile were largely unregulated and unorganised.
Under GST, however, there are provisions for online compliances and payments, and for availing of input credit only when the supplier has accepted the amount. This has brought in accountability and regulation to these industries.
Let us now look at the disadvantages of GST. Please note that businesses need to overcome these disadvantages to run the business smoothly.
Disadvantages of GST
Increased costs due to software purchase
Businesses have to track GST updates regularly. They must ensure that their accounting or ERP software gets updated in real time for GST legal and portal updates. Else, they can go for a GST compliance solution to ensure continuous compliance. But both the options involve money to be invested and needs time commitment for training employees so that there is efficient utilisation of the new GST software.
Clear has a ready-to-use, enterprise-grade GST solution- ClearGST software. Ensure compliance with latest GST laws and rules through AI-powered reconciliations, insightful reports, end-to-end GST return filing, automated Table-4 reporting in GSTR-3B and much more!
Not being GST-compliant can attract penalties
Many small businesses in India are adapting GST changes with every passing month. When the law was first introduced, they had learn to issue GST-complaint invoices, be compliant with digital record-keeping, and of course, file timely returns. This means that the GST-complaint invoice issued should have had mandatory details such as GSTIN, place of supply, HSN codes, and others.
These same invoices can be easily imported through various options for accurate return filing through the ClearGST platform.
GST brought about a rise in operational costs
GST changed the way taxes are paid and returns are filed. Businesses needed to employ tax professionals who had expertise to stay GST-complaint. This gradually increased costs for small businesses as they had to bear the additional cost of hiring experts.
Also, businesses needed to train their employees in GST compliance, further increasing their overhead expenses. A plug-and-play, SaaS-based solution such as ClearGST allowed taxpayers to ensure compliance at reasonable cost.
GST came into effect in the middle of the financial year
Initially, as GST was implemented on the 1st of July 2017, businesses followed the old tax structure for the first 3 months (April, May, and June), and GST for the rest of the financial year 2017-18.
Businesses found it hard to get adjusted to the GST regime, and some of them ran these tax systems parallelly, resulting in confusion and compliance issues.
Adapting to a complete online taxation system
Unlike earlier, businesses are had to switch from pen and paper invoicing and filing to online return filing and making payments. This was tough for some smaller businesses to adapt to.
The process for GST return filing on ClearGST is easy to follow. Business owners need to only upload their invoices through easy-import options, and the software will populate the return forms automatically with the information from the invoices for an error-free end-to-end filing. Any errors in invoices will be clearly identified by the software in real-time, thus increasing efficiency and timeliness.
SMEs have a higher tax burden
Smaller businesses, especially in the manufacturing sector have faced difficulties under GST. Earlier, only businesses whose turnover exceeded Rs.1.5 crore had to pay excise duty. But now any business whose turnover exceeds Rs.20 lakh have to pay GST.
However, SMEs with a turnover upto Rs.75 lakh can opt for the composition scheme and pay only 1% tax on turnover in lieu of GST and enjoy lesser compliances. The catch though is these businesses will then not be able to claim any input tax credit. The decision to choose between higher taxes or the composition scheme (and thereby no ITC) continues to be a tough one for many SMEs.
Conclusion
Change is definitely never easy. The government is trying to smoothen the road to GST. It is important to take a leaf from global economies that have implemented GST before us, and who overcame the teething troubles to experience the advantages of having a unified tax system and easy input credits. GST continues to evolve well from the past years by involving AI and ML in data analytics. The measures have plugged revenue leakages and has also catered to auto-populating different returns with more validated details to avoid errors at source.
The key is to be GST-compliant at any time. Continue reading our articles and watch our GST tutorial videos.
Goods and services tax (Canada)
Goods and services tax[1] (GST; French: Taxe sur les produits et services) is a value added tax introduced in Canada on January 1, 1991, by the government of Prime Minister Brian Mulroney. The GST, which is administered by Canada Revenue Agency (CRA), replaced a previous hidden 13.5% manufacturers’ sales tax (MST).
Introduced at an original rate of 7%, the GST rate has been lowered twice and currently sits at rate of 5%, since January 1, 2008. The GST raised 11.7% of total federal government revenue in 2017–2018.[2]
In five provinces, Nova Scotia, New Brunswick, Newfoundland and Labrador, Ontario and Prince Edward Island, the GST is combined with provincial sales tax (PST) into a harmonized sales tax (HST). In Quebec both GST and QST are collected and administered together by the provincial government.[3] British Columbia had an HST from 2010 until 2013, when it was removed after a provincial referendum. Alberta and the territories of Yukon, Northwest Territories and Nunavut have the GST but no provincial or territorial sales taxes.
Definition
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The goods and services tax is defined in law at Part IX of the Excise Tax Act. GST is levied on supplies of goods or services purchased in Canada and includes most products, except certain politically sensitive essentials such as groceries, residential rent, medical services, and services such as financial services. Businesses that purchase goods and services that are consumed, used or supplied in the course of their “commercial activities” can claim “input tax credits” subject to prescribed documentation requirements (i.e., when they remit to the Canada Revenue Agency the GST they have collected in any given period of time, they are allowed to deduct the amount of GST they paid during that period). This avoids “cascading” (i.e., the application of the GST on the same good or service several times as it passes from business to business on its way to the final consumer). In this way, the tax is essentially borne by the final consumer. This system is not completely effective, as shown by criminals who defrauded the system by claiming GST input credits for non-existent sales by a fictional company.[4] Exported goods are “zero-rated”, while individuals with low incomes can receive a GST rebate calculated in conjunction with their income tax.
Untaxed items
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The tax is a 5% tax imposed on the supply of goods and services that are purchased in Canada, except certain items that are either “exempt” or “zero-rated”:
- For tax-free — i.e., “zero-rated” — sales, GST is charged by suppliers at a rate of 0% so effectively there is no GST collected. However, when a supplier makes a zero-rated supply, it is eligible to recover any GST paid on purchases used in producing the particular supply or service. This effectively removes the cascading tax from these particular goods and services.
- Common zero-rated items include basic groceries, prescription drugs, inward/outbound transportation and medical devices (GST/HST Memoranda Series ME-04-02-9801-E 4.2 Medical and Assistive Devices). Certain exports of goods and services are also zero-rated. Print books and print scholarly journals are untaxed; however, ebooks and online periodicals are taxed as well as any periodicals with a significant amount of advertising.
- For tax-exempt supplies, the supply is not subject to GST and suppliers do not charge tax on their exempt supplies. Furthermore, suppliers that make exempt supplies are not entitled to recover GST paid on inputs acquired for the purposes of making the exempt good or service (subject to certain public sector body rebates). Tax-exempt items include long term residential rents, health and dental care, educational services, day-care services, music lessons, legal aid services, and financial services.
Background
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In 1989, the Progressive Conservative government of Prime Minister Brian Mulroney and his finance minister Michael Wilson proposed the creation of a national sales tax of 9%. At that time, every province in Canada except Alberta already had its own provincial sales tax imposed at the retail level.
The purpose of the national sales tax was to replace the 13.5% Manufacturers’ Sales Tax (MST) that the federal government imposed at the wholesale level on manufactured goods. Mulroney claimed the GST was implemented because the MST was hindering the manufacturing sector’s ability to export competitively. Manufacturers were concerned that the tax hurt their international competitiveness. The GST also replaced the Federal Telecommunications Tax of 11%.
The introduction of the GST was very controversial. Although the GST was promoted as revenue-neutral in relation to the MST, a large proportion of the Canadian population disapproved of the tax. The other parties in Parliament also attacked the idea as did three Progressive Conservative Members of Parliament, David Kilgour, Pat Nowlan, and Alex Kindy, who ended up leaving the Progressive Conservative caucus as a result.
The Liberal-dominated Senate refused to pass the tax into law. In an unprecedented move to break the deadlock, Mulroney used a little-known constitutional provision (Section 26 of the Constitution Act, 1867) to increase the number of senators by eight temporarily, thus giving the Progressive Conservatives a majority in the upper chamber. In response, the Opposition launched a filibuster and further delayed the legislation.
Despite the tax being lowered to 7% by the time it became enacted, it remained controversial. What the tax covered also caused anger. The Government defended the tax as a replacement for a tax unseen by consumers because it was placed on manufacturers, and in the long run it was posited that removing the MST would make Canada more competitive. Once the MST was replaced with the GST prices did not initially fall by the level some thought appropriate immediately; however, proponents have argued that in Canada’s market economy the MST’s replacement could only be expected to influence prices over time and not on a stroke.
Despite the opposition, the tax came into force on January 1, 1991.
Reactions
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A strong Liberal Party majority was elected under the leadership of Jean Chrétien in the 1993 election. The Progressive Conservative Party fared very poorly in that election, winning only two seats. Although the party recovered somewhat in subsequent elections, it remained the smallest party in the House of Commons until it disbanded itself permanently in 2003, and merged with the Canadian Alliance to form the Conservative Party of Canada.
During the election campaign, Chrétien promised to repeal the GST, which the Liberals had denounced while they were the Official Opposition, and replace it with a different tax. Instead of repeal, the Chrétien government attempted to restructure the tax and merge it with the provincial sales taxes in each province. They intended to call it the “Blended Sales Tax”, but opponents quickly came to derisively call this proposal the “B.S. Tax”, and the name was changed to Harmonized Sales Tax before its introduction. However, only three Atlantic provinces (Nova Scotia, New Brunswick and Newfoundland and Labrador) agreed to go along with this plan, joined by British Columbia and Ontario in 2010, and Prince Edward Island in 2013. British Columbia later repealed the tax.
The decision not to abolish or replace the GST caused great controversy. Liberal Member of Parliament (MP) John Nunziata voted against the Liberal government’s first budget and was expelled from the party. Heritage Minister Sheila Copps, who had personally promised to oppose the tax, resigned and sought re-election. She was re-elected with ease in the subsequent by-election, as was the Liberal government in the 1997 election.
Provincial Variance
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In 1997, the provinces of Nova Scotia, New Brunswick and Newfoundland (now Newfoundland and Labrador) and the Government of Canada merged their respective sales taxes into the Harmonized Sales Tax (HST). In all Atlantic provinces, the current HST rate is 15%. HST is administered by the Canada Revenue Agency, with revenues divided among participating governments according to a formula. Ontario and British Columbia both harmonized the GST with their provincial sales tax (PST) effective July 1, 2010. However, the British Columbia HST was defeated in an August 2011 mail-in referendum by a 55% majority vote,[5] and was converted to the old GST/PST system effective April 1, 2013. On the same day, Prince Edward Island enacted HST at the rate of 14%.[6] In Ontario, the HST totals 13%; however, many of the pre-HST exemptions remain affecting only the provincial portion of the HST (for example, prepared food under $4.00 is not subject to the provincial portion of HST and is only taxed at 5%). On the other hand, some items that were only subjected to the PST are now charged the full HST (i.e., 13%). Although the Government of Ontario has made efforts to provide documentation as to what items are affected and how, this causes some confusion for consumers as they are often not sure what taxes to expect at the checkout. To accommodate these exemptions, many retailers simply display each tax individually as HST 1 and HST 2 (or some variant). The move to HST came about as part of Ontario’s 2009 provincial budget.[7] Only three provinces (British Columbia, Manitoba, and Saskatchewan) continue to impose a separate sales tax at the retail level only. Alberta is the exception, not imposing a provincial sales tax.
Current situation
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During the campaign for the 2006 Canadian federal election, the Conservative Party pledged to reduce the GST immediately by 1 percentage point and thereafter by another percentage point in the next five years.[8] That pledge was criticized by then Finance Minister Ralph Goodale as favouring the “biggest spenders” who would receive the biggest savings.[9] On July 1, 2006, the Government of Canada reduced the tax by 1 percentage point (to 6%).[10][11] They again lowered it to 5%, effective January 1, 2008.[12] This reduction was included in the Final 2007 Budget Implementation Bill (Bill C-28),[13] which received Royal Assent on December 14, 2007. This change has been estimated to have decreased government revenues by approximately $6 billion.[14][15] Opponents of these tax decreases cited that sales taxes target those who spend more and therefore such reductions disproportionately benefit Canadians giving those who have the most and spend the most the largest tax decrease.[10]
Much of the reason for the notoriety of the GST in Canada is for reasons of an obscure Constitutional provision. Other countries with a Value Added Tax legislate that posted prices include the tax; thus, consumers are vaguely aware of it, but “what they see is what they pay”. Canada cannot do this because jurisdiction over most advertising and price-posting is in the domain of the provinces under the Constitution Act, 1867.[16] The provinces have chosen not to require prices to include the GST, similar to their provincial sales taxes. As a result, virtually all prices (except for fuel pump prices, taxi meters and a few other things) are shown “pre-GST”, with the tax (or taxes) listed separately.
See also
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- Sales taxes in Canada
- Taxation in Canada
- Goods and Services Tax (Australia)
- Goods and Services Tax (Hong Kong)
- Goods and Services Tax (India)
- Goods and Services Tax (Malaysia)
- Goods and Services Tax (New Zealand)
- Goods and Services Tax (Singapore)
- Value Added Tax
- Value Added Tax (United Kingdom)
References
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- ^ “Canada Revenue Agency/Agence du revenu du Canada”. 27 November 2019.
- ^ “Annual Financial Report of the Government of Canada Fiscal Year 2017–2018: Composition of Revenues for 2017–18”. Department of Finance, Government of Canada.
- ^ “Basic rules for applying the GST/HST and QST”. Revenu Québec. Retrieved February 4, 2019.
- ^ “Opening Statement to the Standing Committee on Public Accounts: Enforcing the Goods and Services Tax”. Office of the Auditor General of Canada. March 19, 2003. Archived from the original on February 18, 2006.
- ^ “B.C. votes 55% to scrap HST”. CBC News. August 26, 2011. Retrieved March 7, 2014.
- ^ “HST takes effect on P.E.I.” CBC News. April 1, 2013. Retrieved March 7, 2014.
- ^ “Comprehensive tax reform package” (Press release). Ministry of Finance (Ontario). March 26, 2009. Archived from the original on August 1, 2009.
- ^ Conservative Party of Canada. “Stand Up for Canada – Federal Election Platform, 2006” (PDF). poltext.org. p. 16. Retrieved 12 November 2022.
- ^ “Harper vows to reduce GST”. CBC News. December 1, 2005. Retrieved 2011-03-30.
- ^ Jump up to:a b Babbage, Maria (2007-12-31). “Harper touts reduction in GST”. Toronto Star. Retrieved 2011-03-30.
- ^ “July 1 marks first day of GST reduction”. CTV News. July 1, 2006. Archived from the original on 2012-03-24. Retrieved 2012-03-08.
- ^ Ferguson, Rob (January 1, 2008). “One last trim: 5% GST kicks in”. Toronto Star.
- ^ “Government of Canada Provides Broad-Based Tax Relief for All Canadians”. Department of Finance Canada. December 14, 2007. Archived from the original on 2007-06-28.
- ^ Akin, David (2006-11-21). “GST cut top priority for Conservatives”. CTV News. Archived from the original on 2012-03-24. Retrieved 2012-03-08.
- ^ “What constrains Flaherty’s budget”. The Globe and Mail. Toronto. February 18, 2008.
- ^ Sherman, David M. “Policy Forum: Tax-Included Pricing for HST—Are We There Yet?” (PDF). Canadian Tax Journal. 57 (4). Toronto: Canadian Tax Foundation: 846–848. ISSN 0008-5111.
External links
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- Canada Revenue Agency: GST/HST for businesses
- Excise Tax Act (see “PART IX : GOODS AND SERVICES TAX”)
- Peter S. Spiro (1993). “Evidence of a Post-GST Increase in the Underground Economy” (PDF). Canadian Tax Journal. Archived from the original (PDF) on 2009-03-27.