GST: Advantages and Disadvantages in India | Motilal Oswal
Introduction
When the Goods and Services Tax (GST) was launched on July 1, 2017, it was hailed as India's biggest tax reform since Independence. The slogan "One Nation, One Tax" promised to unify a fragmented market, eliminate the cascading effect of taxes, and boost economic growth.
Fast forward to 2025, and the GST landscape has matured significantly. We have seen record-breaking monthly collections, a streamlined e-invoicing system, and a massive shift towards formalization. However, the journey hasn't been without potholes. Small businesses continue to struggle with compliance costs, the portal occasionally experiences glitches, and the multiple tax slabs remain a point of debate.
As a business owner or a consumer, it is essential to look beyond the headlines. Does GST actually save you money, or does it add to your operational burden? In this guide, we will conduct a balanced analysis of the pros and cons of the GST regime as it stands today.
Open Demat account - Start investing with a quick setup
Table of Contents
- The Core Objective of GST
- Top 5 Advantages of GST (The Pros)
- Top 5 Disadvantages of GST (The Cons)
- Impact on Inflation: Then vs Now
- Ease of Doing Business: Reality Check 2025
- The "Cascading Effect" Explained
- Challenges for Small Businesses (MSMEs)
- Impact on the Common Man
- Future Outlook: GST 2.0?
- FAQs
The Core Objective of GST
The primary goal of GST was to replace a complex web of indirect taxes (Excise, VAT, Service Tax, Octroi, Luxury Tax) with a single, destination-based tax.
By doing this, the government aimed to:
- Remove the "Tax on Tax" (Cascading effect).
- Create a common national market.
- Increase the tax base by bringing unorganized sectors into the formal economy.
Top 5 Advantages of GST (The Pros)
1. Elimination of Cascading Effect
Before GST, you paid Excise Duty on manufacture and VAT on sale. You couldn't claim credit for one against the other. This "tax on tax" inflated prices. Under GST, the seamless flow of Input Tax Credit (ITC) ensures you are taxed only on the value added at each stage.
2. Simplified Online Compliance
Gone are the days of running to different departments for VAT, Excise, and Service Tax. Today, everything—registration, return filing, payment, and refunds—happens on a single portal (GSTN). In 2025, automation tools like e-Invoicing and auto-populated returns (GSTR-2B) have further reduced manual errors.
3. Boost to Logistics and Efficiency
The removal of state-border check posts (Octroi/Entry Tax) has been a game-changer. Trucks that used to wait for hours at state borders now move freely with E-way Bills. This has reduced logistics costs by 20-30% and improved delivery speeds.
4. Increased Tax Revenue
The digital trail created by GST makes evasion difficult. If a retailer wants to claim credit, their supplier must upload the invoice. This self-policing mechanism has led to record monthly collections (regularly crossing ₹1.8 Lakh Crore in 2025), funding national infrastructure.
5. Composition Scheme for Small Businesses
To protect small players, the Composition Scheme allows businesses with turnover up to ₹1.5 Crore to pay a flat, low tax rate (1% for traders, 5% for restaurants) and file a simple annual return, sparing them from rigorous compliance.
Top 5 Disadvantages of GST (The Cons)
1. High Compliance Burden
For a small trader, filing 2 monthly returns (GSTR-1, GSTR-3B) plus an Annual Return is a lot of work. The cost of hiring an accountant and buying software has increased operational expenses for MSMEs.
2. Technical Glitches
Despite improvements, the GSTN portal still faces downtimes during peak filing dates. A technical glitch can lead to late fees, which feels unfair to honest taxpayers.
3. Blocked Working Capital
For exporters and businesses with an inverted duty structure (buying raw material at high tax, selling finished goods at low tax), getting refunds takes time. This blocks critical working capital, affecting cash flow.
4. Complex Rate Structure
Unlike many countries with a single GST rate, India has multiple slabs (0%, 5%, 12%, 18%, 28%) plus Cess. Classifying a product correctly is a challenge, leading to disputes and litigation.
5. Petroleum and Alcohol Exclusion
Two major revenue generators—Petrol/Diesel and Alcohol—are still outside GST. This means the industry cannot claim credit for taxes paid on fuel, keeping logistics costs artificially high.
Impact on Inflation: Then vs Now
When GST was introduced, there was a fear of inflation. Initially, costs did rise in the service sector (Service Tax jumped from 15% to 18%). However, for consumer goods (FMCG, Electronics), prices have largely stabilized or dropped due to the removal of cascading taxes. In 2025, the anti-profiteering authority ensures that tax rate cuts are passed on to consumers.
Ease of Doing Business: Reality Check 2025
- Registration: Getting a GST number is now faster with Aadhaar authentication.
- Refunds: Automated for exporters, but still manual/slow for others.
- Assessments: Faceless assessments have reduced harassment, but the volume of automated notices for petty mismatches has increased anxiety for businessmen.
The "Cascading Effect" Explained
- Pre-GST Scenario: Manufacturer sells a shirt for ₹100 + ₹10 Excise. Wholesaler buys at ₹110. He adds a margin of ₹40. He pays VAT on ₹150. He pays tax on the excise duty portion too.
- GST Scenario: Manufacturer sells for ₹100 + ₹5 GST. Wholesaler buys. He claims ₹5 credit. He adds margin. He pays tax only on his value addition. This lowers the final price for you.
Challenges for Small Businesses (MSMEs)
The "Digital Divide" is real. A small shopkeeper in a tier-3 town may struggle to generate E-way bills or reconcile GSTR-2B every month. The strict "Input Tax Credit" rules (where you lose money if your vendor doesn't file) effectively force small businesses to act as tax enforcers for the government.
Impact on the Common Man
- Positive: Prices of many goods (Smartphones, Cars, FMCG) have become transparent. You know exactly how much tax you are paying.
- Negative: Services (Dining out, Banking, Telecom) have become expensive due to the 18% slab.
Future Outlook: GST 2.0?
Experts predict a move towards "GST 2.0"—a simplified version with fewer slabs (merging 12% and 18% into a standard 15% rate) and bringing Petroleum under the ambit. This would truly realize the vision of a simplified tax structure.