Ways GST impacts startup by Shreya Bhardwaj
Positive Impact of GST on Small Businesses
1) Ease of doing business: At present, a business has to get registered with various tax authorities, maintain many documents and file different tax returns to different authorities. In the current tax regime, people planning to start a business have to undergo a VAT registration with State’s sales tax department. This registration has to be done with each state where the business has to carry out its operations. Moreover, different states have different VAT rates, regulations and procedures. Post GST, there will be single registration and very less paper work. The business owners would now be able to focus their energy in carrying out productive business operations rather than complying with complicated tax laws.
2)Reduced logistics cost: On many occasions, you must have seen long queues of trucks at a state’s border. These trucks have to pay entry taxes or octroi every time they enter a state. These taxes are collected by individual states.The queuing up of trucks near the toll plazas to pay taxes to pass through the state leads to a lot of time wastage. Moreover, apart from octroi, CST is also levied on inter-state movement of goods. Truck drivers have to furnish documents relating to CST at the state borders. Many states do not supply goods across states due to octroi. GST will reduce logistics/ transportation costs and time to a great extent by replacing CST and octroi.
3)Expansion of business: Most small businesses restrict their business operations to one state due to inter-state taxes and complicated tax procedures. This limits their customer base to the state where they are located. GST will simplify the inter-state tax complications, reducing the cost of supplying goods across states. This will encourage business owners to expand business Pan India; thus, increasing their customer base.
4)Reduced tax burden: Under the current scenario, businesses with turnover of less than Rs. 5 lakhs do not have to pay the VAT registration fee. This limit has been increased to Rs. 20 lakhs under the proposed GST bill. This would reduce the tax burden on the SMEs.
5)Elimination of the distinction between goods and services: In the current tax regime, VAT is applicable to goods and Service Tax is applicable to services. However, post-GST, a uniform tax will be levied on both goods and services, making invoicing simpler. Businesses will be able to take advantage of the tax incentives in a better way. This will greatly reduce tax evasion.
6)Elimination of tax on tax(cascading effect): Cascading effect is a situation where tax is imposed on previously charged taxes. For example, a product on which excise duty has been paid can also be liable to VAT. Imagine a situation where a manufacturer produces a certain item for Rs.100. He charges excise duty at 12% and sells it to the shopkeeper at Rs.112. The shopkeeper sells the same item to a consumer at Rs.126 after charging VAT at 12.5%. Therefore, the VAT,which is Rs.14 in this case, has two components : VAT on the cost of the item (12.5% of 100) and VAT on the excise duty (12.5% of 12). The consumer has to bear this additional burden of VAT charged on the excise duty. GST will mitigate the cascading effect of tax as only one tax will be applicable.
Negative Impact of GST on Small Businesses
1)Missing Trader Problem:There is a concept in GST according to which, you’ll get tax credit only if the person before you in the supply chain has paid the taxes as well as filed the return. Even if one supplier in the supply chain doesn’t file the GST return, the next supplier in the chain will have to pay 18% tax on the value added by each supplier in the supply chain.This can affect the small industries badly, since at the small level, the profit margin is very less (say 5% or 10%). So, if you have to pay the entire 18% from your pocket, you might end up in a loss. Moreover, the government will receive taxes twice on the entire supply chain.Therefore, in order to prevent this problem, it becomes very important to check the vendor ratings. GSTN will maintain the vendor ratings. So, if a vendor defaults on paying taxes or filing returns, then his ratings will go down. Therefore, before going ahead with any deal with a vendor, make sure you check his ratings on GSTN.
2)Loss to freelancers: If you do not have a fixed place of business, i.e if you are a freelancer, then you have to register yourself as a ‘casual taxable person’ under the GST. In this case, the Rs.20 lakhs limit is not applicable. Even if you do not have a fixed place of business, you still have to register with GST. This rule is very harsh on freelancers.
3)Technological Challenge: A lot of startups don’t have the expertise to deal with the online systems. So, they might need the help of intermediaries to help them with the registration process. This will add on to their cost.
4)Reverse Charge Mechanism: Post GST, if your turnover is less than Rs.20 lakhs, you do not need to get yourself registered with the GST. If you are doing business with an unregistered dealer, there is a reverse charge applicable on the buyer i.e. he needs to pay GST on his purchase. He also has to issue an invoice for the purchase made by him from the unregistered seller. This invoice has to be uploaded in the GST system.
5)Harsh mechanism of ‘Input tax credit’: Under the GST, input tax credit can only be availed by the buyer if the supplier has paid the tax inside a given window. This is one of the problems which large percentage of startups will face in their lifetime.
6)Decrease in demand for goods: In the present tax system, the manufacturers have to pay no excise duty if their gross turnover is less than Rs 1.5 crores. However, post-GST this limit will be brought down to Rs.20 lakhs. So, the cost of goods and services will increase for the final consumers as the burden of this will be passed on to them. This might in turn, reduce the demand for those goods and services.
There are both pros and cons of the new GST bill. Some factors increase cost for businesses while some reduce it. But, in the long run, the positives will outweigh the negatives and will pave way for a unified national market. more
1) Ease of doing business: At present, a business has to get registered with various tax authorities, maintain many documents and file different tax returns to different authorities. In the current tax regime, people planning to start a business have to undergo a VAT registration with State’s sales tax department. This registration has to be done with each state where the business has to carry out its operations. Moreover, different states have different VAT rates, regulations and procedures. Post GST, there will be single registration and very less paper work. The business owners would now be able to focus their energy in carrying out productive business operations rather than complying with complicated tax laws.
2)Reduced logistics cost: On many occasions, you must have seen long queues of trucks at a state’s border. These trucks have to pay entry taxes or octroi every time they enter a state. These taxes are collected by individual states.The queuing up of trucks near the toll plazas to pay taxes to pass through the state leads to a lot of time wastage. Moreover, apart from octroi, CST is also levied on inter-state movement of goods. Truck drivers have to furnish documents relating to CST at the state borders. Many states do not supply goods across states due to octroi. GST will reduce logistics/ transportation costs and time to a great extent by replacing CST and octroi.
3)Expansion of business: Most small businesses restrict their business operations to one state due to inter-state taxes and complicated tax procedures. This limits their customer base to the state where they are located. GST will simplify the inter-state tax complications, reducing the cost of supplying goods across states. This will encourage business owners to expand business Pan India; thus, increasing their customer base.
4)Reduced tax burden: Under the current scenario, businesses with turnover of less than Rs. 5 lakhs do not have to pay the VAT registration fee. This limit has been increased to Rs. 20 lakhs under the proposed GST bill. This would reduce the tax burden on the SMEs.
5)Elimination of the distinction between goods and services: In the current tax regime, VAT is applicable to goods and Service Tax is applicable to services. However, post-GST, a uniform tax will be levied on both goods and services, making invoicing simpler. Businesses will be able to take advantage of the tax incentives in a better way. This will greatly reduce tax evasion.
6)Elimination of tax on tax(cascading effect): Cascading effect is a situation where tax is imposed on previously charged taxes. For example, a product on which excise duty has been paid can also be liable to VAT. Imagine a situation where a manufacturer produces a certain item for Rs.100. He charges excise duty at 12% and sells it to the shopkeeper at Rs.112. The shopkeeper sells the same item to a consumer at Rs.126 after charging VAT at 12.5%. Therefore, the VAT,which is Rs.14 in this case, has two components : VAT on the cost of the item (12.5% of 100) and VAT on the excise duty (12.5% of 12). The consumer has to bear this additional burden of VAT charged on the excise duty. GST will mitigate the cascading effect of tax as only one tax will be applicable.
Negative Impact of GST on Small Businesses
1)Missing Trader Problem:There is a concept in GST according to which, you’ll get tax credit only if the person before you in the supply chain has paid the taxes as well as filed the return. Even if one supplier in the supply chain doesn’t file the GST return, the next supplier in the chain will have to pay 18% tax on the value added by each supplier in the supply chain.This can affect the small industries badly, since at the small level, the profit margin is very less (say 5% or 10%). So, if you have to pay the entire 18% from your pocket, you might end up in a loss. Moreover, the government will receive taxes twice on the entire supply chain.Therefore, in order to prevent this problem, it becomes very important to check the vendor ratings. GSTN will maintain the vendor ratings. So, if a vendor defaults on paying taxes or filing returns, then his ratings will go down. Therefore, before going ahead with any deal with a vendor, make sure you check his ratings on GSTN.
2)Loss to freelancers: If you do not have a fixed place of business, i.e if you are a freelancer, then you have to register yourself as a ‘casual taxable person’ under the GST. In this case, the Rs.20 lakhs limit is not applicable. Even if you do not have a fixed place of business, you still have to register with GST. This rule is very harsh on freelancers.
3)Technological Challenge: A lot of startups don’t have the expertise to deal with the online systems. So, they might need the help of intermediaries to help them with the registration process. This will add on to their cost.
4)Reverse Charge Mechanism: Post GST, if your turnover is less than Rs.20 lakhs, you do not need to get yourself registered with the GST. If you are doing business with an unregistered dealer, there is a reverse charge applicable on the buyer i.e. he needs to pay GST on his purchase. He also has to issue an invoice for the purchase made by him from the unregistered seller. This invoice has to be uploaded in the GST system.
5)Harsh mechanism of ‘Input tax credit’: Under the GST, input tax credit can only be availed by the buyer if the supplier has paid the tax inside a given window. This is one of the problems which large percentage of startups will face in their lifetime.
6)Decrease in demand for goods: In the present tax system, the manufacturers have to pay no excise duty if their gross turnover is less than Rs 1.5 crores. However, post-GST this limit will be brought down to Rs.20 lakhs. So, the cost of goods and services will increase for the final consumers as the burden of this will be passed on to them. This might in turn, reduce the demand for those goods and services.
There are both pros and cons of the new GST bill. Some factors increase cost for businesses while some reduce it. But, in the long run, the positives will outweigh the negatives and will pave way for a unified national market. more
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Oct 31
As long as cash is accepted in shops, billing can be avoided. Shop keepers will make more money and rob the government. This is a loophole and the dealer / retailer makes more and pockets the money which he never billed collected as tax and will get richer, as the customer is "only" paying MRP. The MRP includes the tax which the trader never billed. The consumer must reduce 4% tax, if bill is not raised before making payment. more
Jul 10
Post GST, there will be single registration -it is good for professionals as well for all services also. more
Jul 07
The whole GST is a half-baked concept. If you are media savvy, you will know that most of the taxes what we pay goes towards paying the huge battalion of Government servants in Centre, States & Local bodies and in all sorts of places whose output is to harass the citizens. The pathetic condition of the Government Depts can be understood only when you visit them. Normally, you cannot get access to any Dept. without facing some touts or glorified consultants. Go to Motor Vehicles Dept of any state and try to get anything done. Unless you pass through these channels you will have a tough time to get anything done. And regarding Income Tax Dept, the amount collected by Govt. from Individuals & Companies do not add up to the cost of maintaining the Dept. Their sole purpose is to finger salaried class & people who oppose the vested interests in positions of power. The tax evaders grease off the palms of decision makers regularly and keep the chain of black money going. The Government has produced after about 17 years of deliberation a GST system which is an absolute nuisance and nobody will know what is happening. It has replaced an already existing cumbersome system with another one equally complicated and it is not a "GOOD & SIMPLE TAX" as being highlighted. The Government in its enthusiasm of doing some spectacular photo-finish reforms has totally forgotten the simple logic that if any system is simple it will work & the chances of failure will be more if it is complicated. Like any other thing, Indian psyche is to copy & not to innovate. I present below a simple system which will be a real path-breaking reform and will benefit everybody except the vested interests i.e the political class & bureaucracy who wants to have a complicated system so that nobody can understand what is happening and keep everybody confused, so that they can milk the masses all the way to the bank. Recent glorious sample is DEMONETIZATION. Even after 6 months of the hyped event nobody knows what the outcome of the whole exercise is except that BJP has swept the important state assembly elections. Now, my suggestions are briefly given below. Full idea is available on request. 1. The Government will fully come out from all commercial activities including Railways, Healthcare & Education. All present public sector / Govt establishments are to be privatized with Government holding 49% of ownership. 2. Income Tax for Individuals & also companies to be totally abolished. So it will reduce conspicuous consumption & all savings will go to Bank and used for development. 3. Only source of tax to the Government will be a Transaction Tax which will be levied only for Goods & services sold to the final individual consumers. In any consumable goods & services category, there will be only two slabs one lower one for mass consumption & other one Luxury which will be much higher. 4. Goods will be only in 3 categories: ready consumable, ready consumable / intermediary and Intermediary. No tax for Intermediary use, Transaction tax only for ready consumables used by Individuals. 5. No Transaction tax for Capital goods used for production/business. Example: Commercial vehicles used for Goods/public transportation. 6. Movement of goods & services will be seamless throughout India as there will be no tax barriers and no question of producing or consuming states. All expenses of the Central, State & Local bodies will be distributed from the collection of Transaction tax from the whole country. There will be substantial reduction of no. of employees in the Govt. & will result in huge saving in public expenditure. 7. All commercial enterprises have to enter in a Govt. maintained centralised system day-to-day activities of the business and the data thus collected will be used for planning by Govt. & private sector for efficiency. 8. The concept starts from the fact that ultimately all activities carried out by Individuals are transformed into Goods & Services to be consumed by the Individuals only. So, is it simple enough or not? Whole detailed concept is available on request more
Jul 06
Thanks for sharing this information Would like to know - what if somebody has VAT registration in 2 or more states. So which one he needs to convert into GST and what need to be done with rest (surrender or it will automatically get merged ?) Is there any penalty if he register /convert for GST? (in July) Do we get any benefit of Service Tax in GST (like input tax credit on goods) How can we cancel Sales Invoice (on Sales return invoices - say after 3-4 weeks) Many thanks in advance for resolving my doubts more
Jul 06
