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In this article, Asmita Topdar pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses Impact of GST on Startups in India.

Introduction

At one stroke, on July 1, 2017, India made entry into a new financial regime known as one nation, one tax by accepting the new Goods and Service Tax (GST) Act, 2017. It subsumed all other existing laws relating to taxes which the companies had to comply with and these laws varied from state to state. This act enables every state to follow and implement only one law for taxation issues. With the implementation of this tax, there has been a shift in focus from tax on production to tax on consumption thus enabling unity among consumers all over India.

By promoting a single platform, GST will improve the unity among Indians by folding plethora of tax central and state levies into itself. The taxpayers are required to pay only one consolidated tax under this new regime unlike the variety of taxes like:

  • Customs duty
  • Excise duty
  • Service tax, and
  • Entry tax etc.

What is a Start-up?

On 17 April 2015, a notification was released by The Ministry of Commerce and Industry defining start-ups. According to the notification, an entity will be recognized as a start-up till up to five years from its date of incorporation. Moreover, its turnover in the last five financial years should not exceed 25 crores and the entity shall work towards:

  • Development
  • Innovation
  • Commercialization of:
    • New products, and
    • Services are driven by:
      • Intellectual property, and
      • Technology.

How GST works?

  1. GST is levied at the point of sale and not production and at each stage of value addition, GST will be levied, thus enabling the buyer to bear only those charges levied by the last supplier in the supply chain.
  2. It enables cheaper goods to reach the final consumers thereby increasing profits and purchasing power of the whole Indian economy.
  3. The initial face of GST will vary as per the different tax slabs. However, GST will act as a catalyst to give a boom to the Indian start-ups thereby strengthening them to flourish as the GST unfolds.

Opinions of business heads on GST

Opinions of various startup owners and how do they look towards this new regime.

Vijay Shekhar Sharma, Founder and CEO Paytm

  • He sees this as the most influential and tsunami-ed move in the tax domain since independence – all for good only!
  • He clearly foresees, the new simplified tax structure would address, interstate supply chain issues and instigate new markets.

Ambareesh Murthy, Founder, Pepperfry.com

His opinion is optimistic about it, for the transparency and simplicity it embeds.

CRISIL

  • According to a report published by CRISIL, country’s GDP will see a boost for the integral role to be played by this newly introduced GST regime and help in reducing fiscal deficit.
  • Both the government and the taxpayers will stand at the advantageous position. Notwithstanding speculations and the initial teething problems, GST appears to be a promising radical reform that ensures:
    • Reduced costs, and
    • A better-streamlined economy
    • Elements that are essential to guarantee success, to lift the spirits and to empower Indian entrepreneurs.

Eligibility for GST registration

  • An entity is eligible to get registration for GST if its turnover exceeds INR 25 Lakhs. However, entities having their operations in northeastern states are comparatively exempted with eligibility requirement being set as a turnover exceeding INR 10 Lakhs.
  • GST registration is mandatory if the entity deals in:
    • Non-taxable products, or
    • The business of exporting products to foreign lands

It includes all entities which are dealing in export of software and had been untaxed previously.

  • Irrespective of the size of turnover, an entity supplying goods and services to another state within India is required to register itself for GST.
  • A provisional registration for six months shall be granted to those companies who were previously registered under those laws which are subsumed by GST such as:
    • VAT registration
    • Service tax registration

These companies, after their six months provisional period have to get GST registration.

A positive impact of GST

Ease of starting a business

  • Previously, a plethora of tax compliance was required on part of new startups in order to start a sound business. With the implementation of GST, which has consolidated all the indirect central and sales taxes into one single bucket.
  • Startup owners can aim for ease of doing business. Now only single registration needs to be done with less paperwork thus making a cumbersome process much simpler.
  • Rather than focusing and wasting time on compliance of complicated tax laws, companies can use this crucial time for productive purposes in order to enhance their business.
  • As per the previous VAT structure, any business with a turnover of more than INR 5 lakh has to get VAT registration and pay VAT which is differ from state to state.
  • Under GST regime, this threshold has been increased to INR 20 Lakhs they’re by exempting SMEs and start-ups from VAT registration.

Decreased cost of logistics

  • GST has reduced cumbersome tax procedures which helped in expediting the inter-state delivery of goods and services all over the country.
  • In earlier times, a truck crossing the state borders had to pay octroi tax and this tax varied from state to state. This would increase the expenditure, thereby increasing the cost of business.
  • GST brings all these taxes under one umbrella with the tax rate being uniform throughout the country.
  • The entire GST process starting from registration to filing returns and payment of GST tax is online.

Eliminates double taxation

  • Previously, the tax was imposed on a good which was already taxed and it led to double taxation. Hence consumers had to pay a price much more than what should be priced.
  • GST levies a tax on the goods finally produced and no value addition takes place at each stage thereby eliminating double taxation.

Easier Invoicing

Invoicing become easier as the tax is applied uniformly and there will be no distinction between goods and services thereby reduce tax evasion and take advantage of various tax incentives.

Consolidation of Multiple Taxes

With the introduction of GST, compliance with complicated taxes, cost of compliance and tough interstate movements have come to an end. Under this regime, only one tax has to be paid making the whole taxation procedure centralized.

Negative Impact of GST

The tax burden for Manufacturing Sector

Previously, manufacturing businesses with INR 1.5 crore turnover were excise duties was paid. The GST has reduced the benchmark to INR 20 Lakhs thus incorporating all small manufacturing start-ups under this cap. This will increase the tax burden on the manufacturing start-ups.

Stringent Input Tax Credit Process

If the supplier has not filed and paid his taxes then he would not be eligible for Input Tax Credit. This will affect startups because if one link in the supply chain breaks it will bring severe damage to the business.

Challenge due to inadequate technology

Initially, the problems may arise with respect to the technology required for GST compliance as all filings and registrations have become online and might pose a problem to comply due to lack of proper technology.

Tax collected at source (TCS)

Initially, the cost will be borne by the start-ups. The start-up owner has to pay the TCS and will only get the refunds from the government after filing the return.

Blocked working Capital

  • With the introduction of a new financial regime, start-ups have to uphold their funds in electronic form with the tax department. This blocks a substantial part of company’s funds leading to blockage of capital.
  • Moreover, the input tax credit system will lead to choked capital. Thus companies have to set aside a portion of their working capital under GST (on which they cannot gain any interest).

Measuring the compliance parameter

  • A numerical figure (GST Compliance Rating) will guide the prospective buyer to decide upon the credibility with the government much like the personal credit score these days.
  • Businesses will do everything to get and keep a good score, seeing the stringent online micro guidelines not only about entering the data but also about payments. The good credit score would come at a cost of specifically deployed bandwidth and funds.

Harsh reverse charge mechanism

If goods are delivered by a small businessman who is exempted from GST, supplies goods to a firm registered under GST, the buyer has to pay GST on such purchases by self-invoicing and this invoice is to be uploaded at GSTN while filing the returns. This cost borne by the buyer is basically a bad debt.

Loss to freelancers

If one is not having a fixed place of business is required to register himself as a casual taxable person under the GST. The provision of INR 20 Lakhs cap is not applicable under this category of freelancers thereby the person has to mandatory register himself with GST.

Points to be noted

An entrepreneur must have a note on these points before starting their start-up.

  1. An entity will be recognized as a start-up till up to five years from its date of incorporation and should work towards development, innovation and deployment of commercial products or services having its turnover not exceeding INR 25 crores.
  2. Companies dealing in non-taxable products or exporting their products to foreign countries are required to have mandatory GST registration.
  3. Registration to file returns and payment of GST tax has been made online.
  4. After implementation of GST, Start-up owners can aim for ease of doing business.
  5. GST implementation has its challenges too in terms of readiness of taxpayers with its technology platform.

Conclusion

In every sector, there are pros and cons of GST. In initial stages, there will be problems faced by the businessmen and owners for implementing GST due to lack of technology and skill required to implement the same. This period of transition will have its own ups and down where startups will face more problems than the businesses which are already established and are burgeoning the reason behind the problem is the restrictions this new regime will pose on the cash flows.

However, start-up owners have external experts as their savior who can help them in filing and registrations thereby allowing owners to focus on the expansion of their business.

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