Impact of GST on Startups and SMEs
Goods and Services Tax (GST), is expected to be a momentous landmark scheduled to be rolled out on 1st July 2017. Hailed as the biggest indirect tax reform in India after Independence, it will replace the existing gamut of taxes like Service, VAT, and Excise with a single, unified countrywide tax. The sense of which is aptly conveyed by the Union Government’s slogan for GST — ‘One Nation One Tax.’
This move is expected to facilitate ease of doing business by simplifying the complexities associated with a multiple tax structure, leading to better compliance. Moreover, GST will not differentiate between goods and services and both will be taxed at a flat rate, greatly reducing tax evasion.
Here, we examine some of the key positives and list out a few concerns that the implementation of GST is likely to bring about for SMEs, start-ups, and small businesses.
- Reduction of Tax Burden:Any person selling goods and services, amounting to less than 20 lakhs in a financial year, will be exempted from GST. The limit is lower from the North-Eastern states with the amount fixed at 10 lakhs. The increase in threshold will exempt many small businesses from paying taxes.
- A Level Playing Field:Bigger companies ‘stock transfer’ goods to other states to avoid paying taxes on interstate movement. They leverage their sizable resources, infrastructure, and logistic setup to execute such moves and avoid paying Central Sales Tax.
Small businesses on the other hand, are not capable of such manoeuvres and end up paying higher taxes. Under GST, the benefits of stock transfer will be negated, as these will also be taxed, thereby ensuring a level playing field.
- Efficient Logistics:Currently, logistics is a key challenge for start-ups and SMEs. The movement of goods across state borders and toll check posts results in higher landing costs and delayed shipments. With GST, there will be no entry tax charged for goods sold or manufactured anywhere in India. There will be uninterrupted movement and faster delivery of shipments, that too at affordable costs.
- Fixed Tax Rates For Composition Scheme: After the recent rates revision, small businesses with a turnover of less than 75 lakh (revised from 50 lakhs earlier) can apply for the composition scheme. Under this scheme, the rates fixed are as follows: 1% for small traders, 2% for manufacturers, and 5% for restaurants.
This is a good move as it will exempt small businesses from the compliance hassle and they will only need to focus on paying tax. These establishments will also not be required to undergo the three-stage filing process every month and will not be required to file their invoices electronically.
- Lower Levy on Jobwork: Heeding to the voices of the industry, the government has decided to lower the levy on jobwork from 18% to 5%. This reduction in taxation of services will benefit several sectors such as leather, textiles, printing and gems and jewellery.
- Lower Exemption Limit For Manufacturing Units: Presently, manufacturing units having a turnover of less than 1.5 crore do not have to pay any duty. Under GST this threshold is expected to be drastically reduced; according to some estimates as low as 25 lakhs. Doing this will bring many SMEs and start-ups under the tax net, thereby impacting their bottom-line.
- The Composition Scheme: Available for businesses with a turnover of less than 75 lakh, it provides some relief for small businesses with fixed tax rates. However, those who opt for this scheme cannot collect tax from customers. They will also have to pay for GST themselves and will also not be allowed to claim any input tax credit.
Some states had demanded that the annual turnover be raised to 1 crore, but as of now the GST council decided to go with 75 lakhs. This cap was decided to avoid significant revenue loss. Having said that, this ceiling will be under review for the next 2-3 years and depending on how it performs, may also be revised.
- Mandatory Registration For e-commerce:Any business that is into e-commerce needs to be registered with GST, even if their turnover is less than 20 lakhs. This is an inconvenience to small businesses that are venturing into the online sales medium with a small budget and limited means.
- GST Compliance Rating:This is one of the biggest concerns for small and medium enterprises. According to GST law, the refund claims will be paid on merit basis/or the compliance rating of the registered taxpayer. For instance, if the compliance rating of a business is 100%, then the refund will be done immediately.
This will affect the bottom-line of the SMEs as they’ll have to allocate a committed resource to ensure timely compliance, else, their working capital will be stuck with the authorities as a pending input tax credit.
Furthermore, any sale that the supplier declares in the online system will have to be validated by the buyer. If the supplier fails to furnish proper details, the buyer will not get tax credit for such goods. In this scenario compliance rating becomes even more pertinent as buyers more focused on getting input tax credits will prefer transacting with suppliers having a high compliance rating. This again will impact small business as they probably are the ones who’ll have a low compliance rating.
- More Manpower Required: With GST, everything will be online and must be updated in real time. This would call for regular updating and on an annual basis 37 returns will have to be filed (three a month and one annually). The number of returns will go up if the business is present in more than one state. For example, if the company is present in four states, the number of returns it will have to file annually will skyrocket to 148.
Optimistic Business Outlook
While it is too early for a verdict, GST seems to be a good move for the Indian economy and will create a healthy environment for growth. However, given the scale of the reform, it is undeniable that understanding and implementing GST will pose a short-term challenge for SMEs and small businesses. Experts believe that once the industry has recovered from the initial hiccups, there will be high compliance leading to more transparency and accountability, which is ultimately good for business.
The situation can be considered akin to the demonetization exercise from November 2016. What started with shock and admiration, soon turned into confusion and chaos. There were immediate challenges and lot of inconvenience was endured. However, soon we all got used to the cash-less modes and we started adapting to the new ways buying and selling. We can safely say that things are now streamlined.
Similarly, GST might seem like a lot of disruption in the short-term, but in the next two to three quarters, it should be business as usual!