If you run a business with over ₹40 lakhs or ₹20 lakhs in annual turnover for goods or services respectively, then your business should be GST registered and reaping its benefits. GST or Goods and Services Tax has been a gamechanger in the Indian economy. It’s a single tax system that unifies multiple indirect taxes (VAT, sales tax, excise duty, etc.) for a seamless experience.

For small businesses, it reduces the burden of paying multiple taxes at different touchpoints and staying compliant. But GST is not without its challenges. On that note, let’s take a closer look at GST advantages and disadvantages, and how as a small business you can benefit from the simplified tax filing process under the GST regime.

Also read: GST registration limit in India (Know whether your business needs to register for GST based on annual turnover)

GST Advantages and Disadvantages in India

Before looking at the GST benefits for small businesses in India, here are some key changes that the GST regime brought:

• No more paying multiple taxes at different stages. GST is a unified, multi-stage, destination-based tax.
• There are different types of GSTs, imposed and collected by the state and central government based on the nature and place of supply.
• There are different GST rate slabs – 5%, 12%, 18% and 28% that most goods and services are categorised under. Some essential goods fall under the NIL or 0% slab while others attract 3% GST (e.g., jewellery).
• The GST filing system is carried out online on the GST portal that helps to maintain transparency and reduces tax evasion.

Before taking a detailed look at the pros and cons of GST systems, here’s an overview of GST benefits and challenges.

GST benefits and challenges:

Also read: Finance Bill vs Money Bill – GST laws and government fiscal policies

GST Advantages: How small businesses benefit from GST?

On that note, let’s understand the GST advantages for small businesses and role in their business growth journeys.

1. Simplified tax system with GST

Before the introduction of the GST regime on 1 July 2017, all businesses had to pay multiple taxes at different stages, to the state and central government. This naturally made the taxation system complex and scope for errors and evasion.

GST simplified this by bringing multiple taxes under one framework. It replaced numerous taxes such as sales tax, service tax, excise duty, octroi, custom duties, entertainment tax, etc. Businesses would only have to pay GST, hence simplifying the entire process.

GST, moreover, is also applicable to export and import. However, since there are different GST slabs, it’s required for the taxpayer to check the GST rate and ensure the right amount is being paid.

This naturally makes taxation simple and easy to adhere to. It allows makes it convenient for businesses to focus on their core competencies while staying compliant.

2. Input Tax Credit advantage

Another GST advantage is Input Tax Credit claims. This allows businesses to reduce their tax liability by claiming the tax already paid on purchases.

Let’s understand this with an example:

ITC claim example:

XYZ Limited runs a small manufacturing business and buys steel from a trusted local steel supplier. GST on steel is 18%. For a transaction of ₹10,000 therefore, GST will be:

GST = 18% x 10,000 = ₹1,800

Total invoice amount = ₹10,000 + ₹1,800 = ₹11,800

Once XYZ Limited has manufactured the goods, it sells the final product to a buyer. Here, once again GST is involved. For instance, if the goods are sold for ₹20,000, GST paid will be:

GST = 18% x 20,000 = ₹3,600

Total invoice amount = ₹20,000 + ₹3,600 = ₹23,600

But XYZ Limited has already paid ₹1,800 as GST during purchase of raw material (i.e., steel). Therefore, during the final goods sale, XYZ Limited will first have to offset the tax of ₹1,800 already paid on purchases (inputs) against the tax during to be paid during sales (output).

ITC = ₹3,600 – ₹1,800 = ₹1,800

This facility was not available during the pre-GST era. This puts lesser burden on taxpayers and enhances the cash flow for small businesses.

The ability to offset GST paid on inputs against output enables to maintain more cash, a healthier balance sheet, and upholds the stability of a small company or business.

3. Reduction in tax evasion

It goes without saying that with the implementation of GST, there was significant reduction in tax evasions.

The advantage of GST is that it is driven by technology and is done on the GST portal. From GST registration to tax filing, returns and refund claims, etc. all actions are conducted on the portal. Manual efforts and paperwork are reduced, and all records of transactions are maintained online.

This shift to digital has not only eliminated room for losing documents or missing deadlines, but also kept the process transparent and trackable in real-time. Any discrepancies or anomalies can easily be detected, and any attempt to evade tax payments, eliminated.

While this has greatly benefited the government in revenue collection, it has also been beneficial to small businesses. There’s clarity in tax systems, reduced need for investment in resources or specialists, and the burden of paperwork and hours lost is forgotten.

SMEs can stay compliant without extensive knowledge of taxation or maintenance of records.

4. Ease in logistics with GST (warehousing, storage, distribution)

The impact of GST on logistics has been monumental. It has helped to reduce logistics costs, simplify taxes across state borders, reduce transportation time, and bring overall logistics efficiency.

• For instance, since GST is a unified tax, it’s now possible for logistics companies to maintain warehouses at strategic locations, instead of having warehouses in every state.
• Moreover, with the elimination of state and centre level taxes, companies can adopt the hub-and-spoke model and leverage the benefit of logistics hubs, fulfilment centres. This would lead to seamless inventory and supply chain management, and reduced costs.
• There is also better route optimisation, since the need to pay different taxes for entry-exit from states is replaced by a single comprehensive tax.

5. Building a competitive landscape for all

GST rules are the same for all. Whether you are a small or large business, taxes are to be paid as per the respective slabs. True, there are some additional benefits that small businesses can leverage (e.g., composition scheme).

This naturally creates a landscape for fair competition. Small businesses can invest more in innovation, digitisation, product enhancement, and stay competitive.

Moreover, with GST, it’s now easier to do inter and intra-state business as there’s no need to pay multiple taxes.

For instance, if Company A (based out of Maharashtra) is doing business with company B (based out of Bihar), only IGST will have to be paid. Whereas, if Company A is doing business with Company C, also in Maharashtra, it will have to pay a comprehensive GST amount, the revenue of which will be shared by the centre and state (i.e. CGST and SGST). (Also read: How to calculate GST using GST calculator).

Small businesses can now expand their business to new markets, grow their customer base, and worry less about multiple tax structures.

GST disadvantages: What key challenges small businesses face?

While there are GST benefits that businesses have leveraged from, it’s not without its challenges. Digitalisation and technology adoption in MSMEs is still in its nascent stages, and this has often been concerning for the widespread adoption of GST and other online methods.

On that note, let’s take a closer look at the challenges and disadvantages of GST for small businesses in India, and the hurdles they encounter while navigating tax structures.

1. Burden of digitisation

Digitisation has not been easy for all. Small businesses, especially those relying on manual efforts and traditional billing and invoicing systems, had to overhaul and transform to keep their business compliant with the GST system.

Considering GST is an online taxation system, it even required additional software purchases, resource hires, training and other changes, to adapt to the GST structure.

However, most businesses have offset the initial implementation setbacks and are gradually adapting to the new online tax regime. (Also read: Top challenges for businesses when going online).

2. Increase in operational expenses

While GST was introduced to simplify a complex tax system and help businesses to increase their cash flow, it did lead to rise in operational costs in the initial days. And that has been a demerit of GST for some.

This was caused mainly due to the investment in software licenses and resource training. In order for businesses to stay GST compliant, most GST eligible businesses would have to upgrade their existing ERP, accounting or billing software to a GST compliant one.

For instance, all businesses with over ₹5 crores in annual turnover will have to be GST e-invoice compliant. This means that all small and medium businesses with ₹5+ crore annual turnover, will have to purchase GST e-Invoice software, train resources on using the tool, and start generating e-Invoices for all future transactions.

In certain cases, this may even require seeking external expertise (e.g., hiring a CA) to generate e-Invoices under GST (i.e., with HSN code, GSTIN, and other details). This naturally put a strain on budgets by increasing overall operational expenses for the business.

Also read: HSN code for goods transport services

3. Complexity in comprehension

Another GST disadvantage has been with reference to comprehending the different GST slabs and paying taxes accordingly.

For instance, GST on steel bars stands at 18%, while GST on road transport is 5%, and that on courier services is 18%.

The different slabs make it challenging for businesses to categorise their products and services and pay taxes. Additionally, there’s also the context of GST exclusive and GST inclusive calculations, all of which can lead to confusion and the risk of being non-compliant.

4. Penalty of non-filing

Non-filing of GST can lead to penalties is one of the main GST disadvantages for SMEs.

Many small businesses, especially those that are new to the GST regime, are still adapting their business to GST norms. Unfamiliarity may result in late or missed payments, the consequences of which can be severe.

For example, fine on late payment can go up to ₹500 even for NIL returns under GSTR-1.

5. Adherence to compliance and more

GST was introduced to keep businesses more compliant. While the objective is genuine, at times, especially for MSMEs, this is often another of GST’s drawbacks.

• Record keeping, filing returns on due dates, generating invoices with all required details – these often puts additional burden on businesses operating with few resources and on limited budgets.
• Registering in every state where business is being conducted (for GST) can add to administrative work overload. This may discourage some MSMEs to scale and expand to new regions.
• Though GST is paid upfront, the actual ITR claim (credits) occurs only after a sale is completed. The gap in timeline may impact cash flows and further deter business growth.

What next for small businesses?

So, what’s next for small businesses? Has GST been beneficial for them? Or was the pre-GST era better?

While GST presents some disadvantages, its merits override them. With the right strategies and resources in places, it’s possible for MSMEs to mitigate GST related obstacles.

The new tax regime has been a boost to businesses overall. It has created a fair ground for all to compete and opened up the country as a single market to explore. It has also enabled businesses to automate and digitise process, reducing paperwork for operational efficiency.

In the Interim Budget speech, while discussing the impact of GST, it was revealed how GST has reduced the tax burden. (Also read: Interim Budget: Tax reforms and compliance). There has been a 2x increase in tax base of GST, with monthly gross GST collection standing at ₹1.66 lakh crores.

With GST, small businesses are better equipped to stay competitive, innovate, and drive their business to success in the right way.