In this article, Hardik Khatri discusses Six Points an entrepreneur running a Software Startup needs to know about GST.
INTRODUCTION
The long awaited GST(Goods and Service Tax) Law is ready for a July 1, 2017 launch, this bill will change the whole concept of how the indirect taxes are levied across various sectors. Every business needs to deposit some taxes other than the Income Tax, these some taxes are called as Indirect taxes such as VAT, Excise duty, Service tax etc. From now on these Indirect taxes will be replaced by a whole new tax which is known as GST, this will not only help the businesses but would also help new businesses oftenly called as Startups as well and buyers too, GST will affect them in a positive way as they don’t have to go through that old method of Double Taxation when instead they can pay the taxes at once. This type of Indirect Tax will be levied on the supply of goods and services and like previous Indirect taxes this will be imposed by Centre as well as State by the recommendation of an institution called as GST council. So now we will discuss everything that an entrepreneur running a Software Startup needs to know about GST.
Understanding GST
GST is an Indirect Tax and focuses on removing all kinds of Tax Barriers not just for the businesses but also for the buyers and will thus create a single tax system. Now what exactly is GST has been discussed below by help of an illustration:
Let’s say a person is looking to buy a Parker Pen and the product will go through the 4 step chain of Manufacturer, Wholesaler, Retailer and consumer.
Current Tax System
Firstly the manufacturer incurs the cost of manufacturing which is Rs 50 and 10% is included in it, then adds a profit margin of Rs 50 and sells it to wholesaler at a price of Rs 110(5+5 as tax)
Secondly the wholesaler adds a profit margin of Rs 20 and further 10% as tax and further sells it to the retailer at a price of Rs 143.
Thirdly, the retailer sells it to the final buyer by adding a profit margin of Rs 30 and 10% tax is included which makes the price of the pen at Rs 190.3. now total tax paid is Rs 40.3
GST System
Firstly, the manufacturing cost of the pen is again Rs 50(along with 10% tax) and manufacturer adds profit margin of Rs 50 so 50+50 = 100 and adding 10% to it the result is 110. But Rs 5 tax is already been paid so effective tax needs to be paid by the wholesaler is Rs 5(Rs 10-5).
Secondly, the wholesaler further adds a profit margin of Rs 20 which brings the sale price of the pen to Rs 120 and at 10% rate of tax the amount to be paid is Rs 12 but Rs 10 has already been collected so retailer will pay only Rs 2.
Thirdly, the retailer further adds the profit margin of Rs 30 which brings the sale price to Rs 150 and at 10% rate of tax the tax to be paid is Rs 15 and further the retailer sells the pen to the final buyer which is the consumer at the sale price of Rs 165(150+5+5+2+3).
So the final price of the pen is Rs 165 and the consumer would have to pay Rs 15 as tax which is quite low as compared to the Current Tax System and it has also eliminated the cascading effect.
Registration
As GST will be replacing a lot of Indirect taxes from 1st July 2017 so it is essential for the existing businesses to migrate to GST and as for the newly set up businesses the registration is not mandatory but in some cases it is. Further for existing businesses if the aggregate turnover is above Rs 20 lakhs then it is required to get registered under GST. This limit is Rs 10 lakhs for the businesses being carried out in the North eastern states[1]
Will a Startup be covered under GST?
The good news for the Startups is that it will not come under the ambit of GST, However, there are certain rules regarding it
- If the aggregate turnover of your Startup is less than ₹ 20 lakhs, then you have a choice whether you want to register or not. Now the question arises whether you should register for GST or not?
- The essentials of Section 24 would also have to satisfy which will be discussed at a later stage.
Whether you should register for GST or not? If yes then what will be the duties?
The ideal answer to this question is Yes because if you are not registered then you cannot legally charge GST on your services and if the customers who are registered under GST and are looking to take services from your Start-up then they would not take services from you as they would like to do it from a business registered under GST. Secondly if the business is registered under GST then you have to fulfil certain obligations and submit the records to the Government. However the business can get registered under GST voluntarily[2].
All your sales are need to be on an invoice which has a specific format and contains description of your goods/services, value, quantity, rate and the amount of tax charged, registration number.
- You need to submit the records of all your purchases and sales every month and all the transactions are needed to be uploaded on an online portal called GST Network. And the taxes are needed to be paid as per the calculations.
Procedure For Registration (Section 25)
This provision talks about the basic procedure that has to be followed in order to register under GST, discussed below are the points to be kept in mind while registering under GST:
- Every person who has to register under section 22 and 24 has to do so within 30 days from the date on which he is eligible to get registered.
- A Person will be granted a single registration in the state or union territory and if there are multiple businesses in the state then a separate registration may be granted.
- Although a person always may not be liable to get registered under section 22 and 24 still if the person wants to register he can go ahead and do so voluntarily.
- Every person must be having a PAN in order to register.
Process for Migration
Whether the business is active and then the registration is to be sought than the business has to migrate from existing tax system to the GST, so how it can be done here’s a detailed analysis of it:
Firstly, you have to open an account on the GST website and necessary details have to be filled such as PAN, Mobile No, Email ID on the GST Network.
Secondly, The form GST REG 02 is required to be filled and the required documents have to be uploaded which are as follows:
- Photograph and details of Promoter, partner and director
- Proof of Constitution of Business
- Proof of principle place of business
- Bank Account details
- Details of Goods and services so supplied
Thirdly, once the filling and submission of the form is completed it has to be forwarded to the respective officer who will then examine it and the GST registration will be given if everything is in order. However if there are any deficiencies found in the application then it has to be communicated to the applicant within 3 working days, to which the applicant has to reply within 7 working days by FORM REG04.
Fourthly, the certificate of the registration shall be granted to the applicant through FORM REG 06.
Advantages
Ease of Starting Business
Under the current tax regime starting a business can prove to be quite hectic like obtaining a VAT registration number and complying with various state laws if the business is giving its services in different parts of the countries. This law will bring about transparency and uniformity in starting a business.
Continuous and efficient flow of goods and services
Startup neither have logistics nor funds so they procure goods through Interstate sales on which they are liable to pay Central Sales Tax. GST will also make the flow of goods faster as the time which was wasted earlier in passing through check posts will be saved.
Promoting the New Businesses
As has been discussed above that the new businesses will be given an exemption if the aggregate turnover of the business is less then Rs 20 lakhs then it is not mandatory for the business to pay GST, however there are certain exceptions to this rule which will be discussed later.
Single location Supplier
When the Startup is located at a particular place and is providing the services from that place then the place or location can be registered under GST. And so the taxes can be paid based on whether the recipient is having its location inside the state or outside.
GST Tax Model
Our country will follow a Canadian model or dual model of GST which is Central GST and State GST. Our country being a federal country will follow this model like Brazil, Canada etc. Like the taxes such as VAT collected by the state will take the form of SGST and would still be collected by state and taxes such as CST (Central sales tax) will take the form of CGST. Meanwhile IGST is the combination of CGST as well as SGST and is collected by the CGST. Here is an image which shows us how the GST model is:[3]
Benefits
- Reduction in the transaction cost
- Reduction in number of taxes from the economy
- It will remove the current cascading effect of the taxes.
Compulsory Registration in several cases (Section 24)
There are certain cases where the registration is mandatory even though Section 22 specifies the limit of having an aggregate turnover of above Rs 20 lakhs yet this Section 22 will be undermined and the businesses have to make sure that they don’t fall under the ambit of Section 24 because if they do then the benefits given under Section 22 won’t be enjoyed by the Businesses. Here are few cases where the registration under GST is mandatory.
- It includes every person who is supplying services via e-commerce.
- Also includes every interstate taxable person who is involved in supply of goods
- Persons who are required to pay the taxes under Section 9(5) Central Goods and Services Tax Bill, 2017
- Persons who make the taxable supply of goods as an agent or by any other way.
- Any other such person as may be notified by the Government onto the recommendations made by the GST Council.
- Persons who are required to pay tax under reverse charge, Reverse charge is a charge which the recipient of the goods and services pays in respect of such categories as may be prescribed by the government[4].
- Every person which is supplying services in the form of Online Information from outside India to a person in India.
So if your startup comes under any of the points mentioned above then it is mandatory for you to register under GST as you are liable to do so and you need to pay taxes according to the rates fixed by the GST council. Meanwhile the GST Council in its recent meeting fixed the prices of common used goods under the four slabs fixed by itself which are 5%, 12%, 18% and 28%, this means that the taxes will be charged under these four slabs and not outside it, So the highlights of the meeting held on 24th may 2017 as well as meeting held on 3rd June 2017 are as follows:
- There shall be no tax on these items: Jute< fresh meat, eggs, natural honey, bread, salt, milk, butter milk, curd, printed newspapers, handlooms etc.
- Items such as edible oil, sugar, tea, coffee, apparel below 1000, footwear below 500, skimmed milk powder, branded paneer, frozen vegetables, medicines, kerosene, spices, Railways, AIr transport and Restaurants will attract a tax rate of 5%.
- Cheese, Ghee, Packaged dry fruits, namkeen, sewing machines, cell phones, agarbatti, umbrella, fruit juices etc will come under 12% mark. And services such as Non AC hotels, business class air tickets and fertilisers as well under ths category.
- Footwear costing more than 500, biscuits, Pasta, cornflakes, Tce cream, sauces, soups, cakes, camera, speakers, monitors, preserved vegetables, mineral water, notebooks, steel products and services such as IT services, Branded garments, AC hotels serving liquor, telecom services will fall here under 18% category.
- Pan Masala, paint, deodorants, shaving creams, after shave, shampoo, sunscreen, bidis, chewing gum, water heater, dishwasher, ATM, vending machine, washing machine, automobiles, vacuum cleaner, motorcycles, chocolate not containing cocoa and services such as 5 star hotels, Cinema etc will attract 28% rate of tax.
- Gold and other jewellery will be taxes at the rate of 3%.
The best online course which will help you comply with the upcoming GST framework.
CERTIFICATION ON GST (GOODS AND SERVICES TAX) INDIA
Conclusion
Since GST will be active from 1st july 2017 the whole country is waiting for it to be applicable while some are opposing the law specially the opposition parties which are in favour of the negatives of GST, But as has been discussed the major problems such as Cascading Effect of the taxes will be removed and there will be ease of doing business in the country these points hold much more value than the criticism of the opposition parties. The GST move will also curb the problem of corruption and black money as there are persons who don’t report each and every transaction and they save taxes such as VAT, Octroi duty etc. And as there is usage of PAN, Aadhar card required for filing GST returns so it will help the Income Tax departments to track each and every transaction.
Suggested readings
References
[1] Section 22, Central Goods and Services Tax Bill, 2017
[2] Section 25(3), Central Goods and Services Tax Bill, 2017
[3]How to, August 15, 2016, What is GST Dual Model?
Available at https://www.youtube.com/watch?v=AS42zdr32GU
[4] Section 2(85), Central Goods and Services Tax Bill, 2017
