Disadvantages of GST: What Businesses and Consumers Should Know?

Ayush Singh, a small manufacturer from Ludhiana with an annual turnover of ₹4.8 crore, experienced unexpected challenges with the implementation of the GST in July 2017. What was intended to simplify taxes instead put a strain on his operations and finances due to complicated filing procedures, delayed tax refunds, and growing compliance costs.

Compliance Complexity for Small and Medium Enterprises (SMEs)

Increased Cost of Operations and Software Adoption

In India, small and medium-sized businesses (SMEs') operational costs have significantly increased since the Goods and Services Tax (GST) was put into effect. These increased costs primarily stem from the need to upgrade technology, hire specialised personnel, and manage the complexities of the new tax system.

Technology Upgrades and Software Costs

To comply with GST requirements, SMEs are required to adopt GST-compliant accounting software. The cost of such software can vary:

• GST Software Purchase: The cost of GST-compliant software ranges from ₹3,500 to ₹4,000 for initial setup.
  
  
• Annual Subscription: Some software providers offer annual subscriptions, which can range from ₹10,000 to ₹15,000 per year, depending on the features and scale of the business.

Training and Skill Development

SMEs often need to invest in training their staff to handle the complexities of the new tax system:

• Training Programs: Costs for training programs can range from ₹5,000 to ₹20,000 per employee, depending on the depth and duration of the training.
  
  
• Ongoing Education: Given the frequent updates to GST regulations, continuous education and training are necessary, leading to recurring costs.

Consultancy and Professional Fees

Many SMEs opt to hire professionals to ensure compliance with GST regulations:

• Consultancy Fees: Hiring a GST consultant can cost between ₹10,000 and ₹50,000 per year, depending on the complexity of the business operations.
  
  
• Accounting Services: For businesses with a turnover of approximately ₹1.5 crore, accounting and GST-related services can cost around ₹1.5 lakh annually.

Impact on Profit Margins

The cumulative effect of these increased costs can significantly impact the profit margins of SMEs:

• Percentage of Turnover: For a business with an annual turnover of ₹1.5 crore, spending ₹1.5 lakh on compliance-related expenses equates to approximately 1% of turnover.
  
  
• Operational Strain: These additional costs can strain the financial resources of SMEs, especially those with limited capital, potentially affecting their competitiveness and growth prospects.

Example: Ayush Singh, who runs a small manufacturing business in Ludhiana with an annual turnover of ₹1.5 crore, faced a sharp rise in operating costs after GST implementation:

This represents about 0.9% of his total turnover, which is significant for a business with tight margins. The increased costs forced Ayush to delay planned machinery upgrades, highlighting how GST compliance can divert funds from core operations.

Delays in Input Tax Credit and Cash Flow Issues

Key Insight:

Even a 60-day delay on ₹10 lakh of ITC could result in an opportunity cost of over ₹16,000, assuming the business relies on borrowed capital at 10% annual interest. For SMEs operating on tight margins, this can create serious cash flow bottlenecks.

Negative Impact on Unorganised Sector and Informal Trade

The implementation of the Goods and Services Tax (GST) in India has had a profound effect on the unorganised sector and informal trade, sectors that constitute a significant portion of the Indian economy.

Economic Contraction in the Informal Sector

Between 2015–16 and 2022–23, the unorganised sector experienced a contraction of approximately ₹11.3 trillion, equating to 4.3% of India's GDP. This decline was attributed to a combination of factors, including the GST rollout, demonetisation, and the COVID-19 pandemic. During this period, about 6.3 million informal enterprises ceased operations, leading to the loss of around 16 million jobs.

Challenges in Compliance and Operational Costs

The GST regime introduced stringent compliance requirements that many informal businesses struggled to meet. These included the necessity for digital invoicing, regular tax filings, and maintaining detailed records. The associated costs and the need for technological upgrades placed a significant burden on small traders and artisans, many of whom lacked the resources to comply with the new regulations .

Shift Towards Organised Retail

The GST's impact on the unorganised sector also led to a shift in consumer purchasing patterns. Small grocers and retailers increasingly turned to organised wholesale suppliers, such as Metro Cash and Carry and Walmart, to ensure GST compliance and maintain business continuity. This transition further marginalised unorganised traders who could not adapt to the new system.

Regional Disparities

The adverse effects of GST on the informal sector were more pronounced in poorer states, where the unorganised sector had a larger presence. The formalisation of the economy, while beneficial in terms of tax collection, led to increased unemployment and economic distress in these regions.

Price Hikes and Consumer Confusion Post-GST Rollout

Note: Even small increases like ₹30–₹50 per service/product accumulate across monthly expenses, affecting middle- and low-income households. A ₹600 yearly hike in insurance or ₹180 more on a family dinner every weekend creates notable inflationary pressure for average consumers.

Conclusion

Although the GST was intended to promote formalisation and streamline the taxation system, the unorganised sector and informal trade faced significant challenges during its implementation. The following economic slump, job losses, and operational difficulties underline the necessity of policies that facilitate informal companies' integration into the formal market without compromising their ability to sustain themselves.

Faqs

Q. Why do small businesses struggle with GST compliance?

Small businesses face high compliance costs and complex return filing procedures under GST.

Q. How has GST affected the informal sector?

GST has led to business closures and job losses in the unorganised sector due to strict digital and filing requirements.

Q. Did GST lead to price increases for consumers?

Yes, GST caused price hikes in services and goods like telecom, insurance, and processed food.

Q. What is a major issue with Input Tax Credit (ITC) under GST?

Delays and mismatches in ITC claims often block working capital and disrupt cash flow for businesses.

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