After more than a decade since it was first suggested, the Goods and Services Tax (GST) has finally become a reality from July 1, 2017, ushering in one of the biggest tax reforms in India since Independence. GST is to be calculated using the input tax credit method, so taxes paid on availing of goods and services in a different state can be claimed, allowing GST-registered businesses to lower their overall costs.
The GST Council has done a fair job by exempting education and healthcare and trying to strike a balance on rates for mass-consumption goods affecting the middle class. However, the GST rate on IT, telecom and financial services has been increased, which will pinch consumers to an extent.
ATM withdrawals, loan processing charges and costs of other banking and financial services have gone up as banks, brokers, distributors, mutual fund houses, insurers will now levy GST at 18% instead of the existing Service Tax at 15 percent.
As per the GST code, the head office and branches of banks and asset management companies are taken as separate entities. This means they would have to register in each state they have a presence in, increasing the burden of compliance and reporting, though clarity is still awaited on this issue.
The need for both large and small companies to be GST-compliant has given a huge boost to the fintech sector. Several companies have registered as GST Suvidha Providers and are offering consultancy services and software solutions for businesses to manage processes related to registration, creating of invoices, filing returns and input tax reconciliation.
Startups and new businesses
Higher threshold for registration
- As per the current VAT structure, any business with a turnover of more than Rs 5 lakh has to get VAT registration and pay VAT (different in different states).
- Under GST this threshold is 20 lakhs thus exempting many small businesses including startups.
- GST also has a scheme of lower taxes for small businesses with turnover between 20 to 50 lakhs though its optional. It is called the composition scheme. This will bring respite from tax burdens to newly established businesses.
Startups can enjoy tax credit on their purchases
A lot of startups are into service industry i.e., they pay service tax. Under GST regime they can setoff the VAT paid on the purchases (say office supplies) with the service tax on their sales which they cannot under current regime.
For example-A startup buys office supplies of 30,000 paying 5%. It charges 15% service tax on services of Rs. 50,000. Currently it has to pay 50,000*15%= 7,500 without getting any deduction of Rs. 1,500 VAT already paid on stationery. Under GST (assuming GST= 18%)
GST on service @18%
Less: GST on office supplies (30,000*18%)
Net GST to pay
Thus it will be a big boon to the startup industry who are mainly providing services. It will result in reduction of costs thus increasing working capital to the already cash-strained startups.
Startups often work on tight budget and cannot devote resources to look after the various tax compliances under Excise, VAT, CST, Service Tax etc. GST will subsume all of this thus reducing the time spent for tax compliances. Also, startups dealing with both goods and services will find it much easier to file and pay one GST tax instead of both VAT and service tax.
Tax burden for manufacturing startups
However, startups in the manufacturing sector will bear the brunt. Under the existing excise laws, only manufacturing business with a turnover more than Rs 1.50 crore has to pay excise. However, with the implementation of GST, the turnover limit has been reduced to Rs 20 lakh thus increasing the tax burden for many manufacturing startups.
E-commerce and other online startups
Many startups are technologically innovative meaning they have a huge presence online. Many startups provide goods and services through the internet. GST is applicable all over India so there is no complication for inter-state movement of goods. Currently, states have different VAT laws. For example, online websites (like Flipkart Amazon) delivering to Uttar Pradesh, have to file a VAT declaration and the registration number of the delivery truck. Tax authorities sometimes seize goods when there is a failure to produce documents.
Again, they are treated as facilitators or mediators by states like Kerala, Rajasthan, West Bengal not requiring them to register for VAT.