In July of 2017, Goods and Services Tax (GST) were introduced as one of the biggest and ambitious tax reforms in India. GST tried to provide transparency, efficiency, and uniformity in the economy through replacing a web of indirect taxes by a single uniform tax structure. Mostly because of the fact that big businesses could afford to make the transition painlessly, startups and small businesses found themselves at a very cross-shaped road-being left to struggle to keep up the changes, and at the same time given the chance to do so and thrive.
Being a nation with a huge base of Micro, Small and Medium Enterprises (MSMEs), it is crucial to know impacts of GST on their work. This blog looks into the actual and perceived effects of GST as it applies to emerging businesses and the implication of the GST, challenges it presents and changing compliances.
KEY AREAS OF IMPACT.
1.Unified Tax Structure and Simplified Operations
Before introduction of GST, businesses played under various indirect taxes like VAT, Service Tax, Excise Duty, and Entry Tax. This system of complexity established compliance issues and restricted interstate commerce.
Post-GST Impact:
The startups currently enjoy one nation one tax. They are no longer faced with the need of registering many times under the different states and tax cascading has also been done away with to a considerable extent. This has created ease in pricing and clarity in operations especially in case of e-commerce and service-based enterprises.
2.Input Tax Credit (ITC) Mechanism
With GST, companies are able to avail credits on taxes paid on inputs which are utilized in production of goods or services. This is a paradigm change of the previous regime in which the tax credits often culminated into the state or the category as is in the case with the earlier regime.
Post-GST Impact:
The startups already have upgraded cash flow and lower taxes, as they can reduce their tax expenses in the form of hassle-free credit claims. The kicker of this advantage is that it only occurs when the vendors are prompt with their compliance and invoice matching, which is a practical hitch.
3.Digital Compliance: A Double-Beneficial
Registration as well as returns of GST are purely online. Although this is the best-case scenario with digital-first startups, it was initially a challenge to traditional smaller organizations.
Post-GST Impact:
Technology-friendly companies can enjoy tracking in real time, digital audit trails, and minimal physical paper works. However, operations pressure on smaller firms has grown especially due to compliance agendas where they have slow internet or do not know much about the use of digital.
4.The Composition Scheme: Relief with Restrictions
In order to make it simpler on the smaller businesses, the government came up with a scheme known as the Composition Scheme wherein the businesses with a turnover that is less than 1.5 crore will be required to pay a reduced rate of tax under this scheme but with very little and minimal requirements of filing.
Post-GST Impact:
This has eased the burden of compliance by the retailers and small service providers. Nevertheless, by registering to this scheme, there are no opportunities to make interstate sales, as well as there are no input tax credits, and it is not quite an attractive decision to growing startups.
5.Boost to Interstate Trade and Market Expansion
Earlier inter-state transport of commodities was a costly and tedious exercise due to the existence of tax on the commodity such as Octroi and Entry Tax.
Post-GST Impact:
GST has also brought much ease on interstate trade as the startups have been able to expand in different regions without fretting about logistical taxation issues. This is particularly advantageous to D2C brands, online sellers and product-based startups.
LEGAL AND POLICY SUPPORTS UNDER GST FOR STARTUPS AND SMALL ENTERPRISES.
1.GST Council Recommendations and Threshold Revisions
This is because the burden on small business can be reduced by reviewing and revising rules that are being done regularly by the GST Council which is a constitutional authority under Article 279A of the Constitution.
•The threshold of compulsory GST registration raised to 40 lakhs (in most states) against 20 lakhs as the compulsory GST assessment limit on the suppliers of the good.
•QRMP scheme has Quarterly Return Filing option to taxpayers whose turnover is up to 5 crores.
2.E-Invoicing Exemptions for Small Businesses
In comparison, under Rule 48(4) of the CGST Rules, e-invoicing has to be adopted only by those enterprises whose turnover is more than a specific level (5 crore at present).
3.Section 16 of the CGST Act – Input Tax Credit (ITC)
This section provides the right to claim ITC for all eligible purchases and services used in the course of business.
4.Udyam Registration and MSME (Micro, Small and Medium Enterprises) Benefits
Although not directly regulated by the GST, the Udyam Registration (connected with PAN and GSTIN) helps the MSMEs to get access to numerous government schemes, including:
The Credit Guarantee Schemes
Loans subvention of interest
Preference in lending and purchase
5.Notification No. 10/2017-Central Tax
This enables startups that have a lesser turnover than the threshold amount to voluntarily register to GST.
6.Reverse Charge Mechanism (RCM) Relaxations
Section 9(4) RCM previously imposed heavy provisions on unregistered supplies. The legislation was modified thus temporarily suspending RCM on the majority of business-to-business deals that involve small businesses.
7.Composition Scheme – Annual Return Relief
Under rule 62 of CGST Rules, business under the composition scheme only need to file:
CMP-08 (Quarterly statement)
GSTR-4 (Annual return).
FAQ’s
Q1. Does every startup have to be registered on GST?
Only in case that annual turnover exceeds 40 lakhs (20 lakhs in case of service providers in certain states). Nevertheless, it is recommendable to register voluntarily in order to claim input tax credit.
Q2. Which are the primary GST concerns to small businesses?
A return filing, invoice mismatch, delays in ITC claim, and adjusting to the digital system are other prime issues for most small enterprises.
Q3. Has GST increased or reduced the cost of doing business?
Although the initial compliance cost has increased, long-term transparency, efficiency and perfection in flow of credit reduced the effective tax burden poster face of the majority of compliant businesses.
Q4. Is the Composition Scheme an option to small startups?
This is good to small retailers and service providers whose turnover is low. Nevertheless, it is something that growth-driven startups can opt to shun because of ITC restraints and a lack of a large market base.
Q5. What has happened to e-commerce startups with GST?
Positively. It enables equal treatment of taxes, eliminates entry barriers and simplifies the process of onboarding vendors. Platform compliance (such as TCS deduction and filing of returns) however needs to be handled with caution.
CONCLUSION.
One thing that cannot be undermined is the fact that GST has transformed the business tax environment in India. It was an eye-opener and a nightmare at the same time to startups and small businesses. Whereas the integrated system facilitates growth of the market, market disclosure, and less cascading of tax, it also requires digital readiness and uniform improvement.
As the system becomes more mature and further regulations are hammered out, what will ultimately determine the true effect of GST is the ability of small business to adapt to it, and the manner in which policy adjusts further towards accommodating the growth of small business. At least in the short-term, GST is not only a tax reform, but also a test of India eager to enter the world with the power of entrepreneurship in its own strength.
