Can a startup do business without GST?

Are you wondering can a startup do business without GST? Many entrepreneurs face this dilemma. Let's explore whether GST is mandatory for startups, selling online, or listing on platforms like Amazon. Get the clarity you need to stay compliant and avoid penalties.

Read on to discover when GST is required and how it impacts your business operations.

Introduction

Starting a business in India involves numerous legal and tax considerations. One such question often arises—Is GST mandatory for startups? Understanding whether your business needs GST registration is crucial for compliance and avoiding penalties. 

In this blog, we'll break down whether you can do business without GST and the implications of doing so. Whether you're selling online, on Amazon, or simply running a small business, this guide will help you make an informed decision.

Understanding GST and Its Importance for Startups

GST is a comprehensive indirect tax levied on the supply of goods and services in India. For many businesses, it’s mandatory to register and comply with GST regulations, but the rules differ based on the size, type of business, and turnover. So, Is GST mandatory for startups?

Subject to certain exceptions, If a startup is dealing with taxable goods or services and crosses the prescribed turnover threshold, it is required to register for GST. On the other hand, smaller startups or those dealing with exempt goods/services may be exempted from GST registration. Let’s dive deeper into the key factors that determine whether GST registration is mandatory for your startup.

Conditions where GST is not mandatory for startups

• Annual Turnover Below GST Threshold: For startups with low turnover, GST registration is not mandatory. The current threshold limits for GST registration are:

• ₹20 lakhs (₹10 lakh for special category states).
• ₹40 lakhs for businesses exclusively involved in the supply of goods subject to such conditions and limitations as notified

If your startup’s turnover remains below these limits, you are not required to obtain GST registration. However, if you are selling goods or services online, you may opt not to obtain GST registration subject to fulfillment of certain prescribed conditions. However, this can change if your turnover exceeds these limits, in which case, GST registration becomes mandatory.

• Exempted Goods and Services: There are certain exempt goods and services under GST, such as agricultural products, certain educational services, and healthcare services. 

If your startup deals exclusively in these exempt items, you are not required to register for GST, regardless of your turnover. You can continue your business operations without the complexities of GST compliance.

Selling Online Without GST: Is It Possible?

When it comes to selling goods on e-commerce platforms like Amazon or Flipkart, sellers often wonder whether GST registration is mandatory if their turnover is below the GST threshold of ₹20 lakh (or ₹10 lakh for special category states). The answer lies in the rules governing e-commerce transactions under the GST regime. The conditions stipulated are as follows :-

(i) such persons shall not make any inter-State supply of goods; 

(ii) such persons shall not make supply of goods through electronic commerce operator in more than one State or Union territory; 

(iii) such persons shall be required to have a Permanent Account Number issued under the Income Tax Act, 1961;

(iv) such persons shall, before making any supply of goods through electronic commerce operator, declare on the common portal their Permanent Account Number issued under the Income Tax Act, 1961 (43 of 1961), address of their place of business and the State or Union territory in which such persons seek to make such supply, which shall be subjected to validation on the common portal; 

(v) such persons have been granted an enrolment number on the common portal on successful validation of the Permanent Account Number declared as per clause (iv); 

(vi) such persons shall not be granted more than one enrolment number in a State or Union territory; 

(vii) no supply of goods shall be made by such persons through electronic commerce operator unless such persons have been granted an enrolment number on the common portal; and 

(viii) where such persons are subsequently granted registration under section 25 of the said Act, the enrolment number shall cease to be valid from the effective date of registration. 

Mandatory GST Registration for E-commerce Sellers

Under Section 24(ix) of the CGST Act, any person supplying goods through an electronic commerce operator (ECO) like Amazon is required to register for GST, irrespective of their turnover unless the conditions specified above are fulfilled. This rule is tied to the provision where ECOs are mandated to collect Tax Collected at Source (TCS) under Section 52. As a result, even if your sales are minimal, GST registration becomes mandatory if you list your products on such platforms.

For instance:

• If you sell taxable goods worth even ₹1 on Amazon, GST registration is required.
• However, if the goods fall under exempt categories, such as unprocessed agricultural products, handicrafts, or books, GST registration is not mandatory

Penalties for Selling Without GST Registration

Although selling without GST registration is possible for some startups, there are risks involved. If your startup exceeds the turnover threshold and continues operating without registering for GST, penalties can be severe. The penalty can range from a fine to the collection of tax with interest. Penalties can also be applied if GST registration is required, but the startup fails to comply with the regulations.

When is GST Registration Mandatory for Startups?

• Exceeding the Threshold Limit: If your startup's turnover crosses ₹20 lakhs for, GST registration becomes mandatory. It applies to both online and offline businesses, making compliance essential to avoid penalties.

• E-commerce Sellers and GST Compliance: E-commerce sellers who are engaged in selling taxable goods on online marketplaces like Amazon, Flipkart, etc., must ensure compliance with GST registration irrespective of their turnover.

• Interstate Sales: If your startup plans to engage in interstate sales, you will need to register for GST to collect and remit the correct amount of tax. Without GST registration, you cannot legally sell goods across state borders, as inter-state transactions require specific GST compliance.

• Casual Taxable Persons: If your startup operates occasionally or for a temporary purpose, such as setting up stalls at exhibitions or trade fairs, you must register as a casual taxable person. There is no threshold exemption for casual taxable persons; GST registration is required regardless of turnover.

• Non-Resident Taxable Persons: Any startup or individual not based in India but supplying goods or services in India must register for GST.

• Input Service Distributors (ISD): If your startup receives GST invoices for services used across multiple branches, you must register as an Input Service Distributor to distribute the input tax credit to various branches.

• Reverse Charge Mechanism (RCM): If your startup is liable to pay tax under the reverse charge mechanism, GST registration is mandatory. This applies only when specified goods / services which fall under reverse charge provision are received by specified persons. 
   
• Agents Supplying Goods or Services: Businesses acting as agents or representatives for the supply of goods or services on behalf of other taxable persons must register under GST.

• Supply of Taxable Goods or Services Outside India: Exporters of goods or services are required to register under GST. Exports are interstate supplies and are considered zero-rated, and GST compliance is essential to claim input tax credit or refunds. However, if a service exporter's annual turnover is less than the Rs 20 lakh exemption limit, the company isn’t needed to register for GST.

• Services specified under Section 9(5) of the CGST Act: Section 9(5) of the GST law specifies that for certain services, the responsibility of paying GST falls on the e-commerce operator rather than the service provider. 

This provision covers several types of services. For example, passenger transport services such as those offered through platforms like Uber and Ola are included. Accommodation services booked via entities like Oyo and Goibibo also fall under this rule. 

Additionally, housekeeping services arranged through platforms like Urban Company are covered. Lastly, restaurant services, including those provided by cloud kitchens, are encompassed by this section as well.

• Liability to Deduct TDS or Collect TCS: Businesses required to deduct Tax Deducted at Source (TDS) or collect Tax Collected at Source (TCS) under GST laws must register. 

• Supply of Online Information and Database Access Services (OIDAR): Non-resident startups supplying Online Information and Database Access or Retrieval Services (OIDAR) in India must register for GST.

Benefits of Voluntary GST Registration for Startups

Voluntary GST registration can be beneficial for businesses even if it is not mandatory under GST law. Here are scenarios where applying for voluntary GST registration is advantageous:

• To Avail Input Tax Credit (ITC): Businesses that are registered under GST can claim ITC on GST paid for purchases. This reduces the effective tax burden, making voluntary registration advantageous for entities dealing with taxable goods or services.

• Enhancing Business Credibility: A GST registration number (GSTIN) is often seen as a mark of credibility. Registered businesses are preferred by larger clients and suppliers, as it assures compliance and transparency.

• E-commerce Sellers: For sellers who supply goods through e-commerce platforms, GST registration is required, irrespective of their turnover. This requirement is outlined in Section 24(ix) of the CGST Act, 2017. Sellers are obligated to register for GST, even if their sales are minimal, ensuring that all transactions on e-commerce platforms are accounted for under the tax regime. However, the person can supply through e-commerce operators subject to fulfilment of conditions stipulated.

Have more questions about e-commerce compliances in India? Click here to get answers!

• Competitive Edge: Being registered under GST can make a business eligible for partnerships or contracts with larger companies that deal only with GST-compliant suppliers.

• Participation in Tenders: Many government tenders and corporate contracts require GST registration, irrespective of the business turnover. Voluntary registration enables participation in such opportunities.

• Small Businesses Opting Out of Composition Scheme: Businesses under the turnover threshold for mandatory GST but seeking to avoid the limitations of the composition scheme, such as not being able to issue tax invoices, may opt for normal GST registration.

• Preparing for Future Growth: Voluntary registration helps businesses streamline compliance early and avoid disruptions when their turnover eventually exceeds the GST threshold.

Conclusion

The requirement for GST registration for startups depends largely on your business's turnover, the type of goods or services sold, and whether you're selling online or offline. Startups that fall below the turnover threshold or sell exempt goods can operate without GST registration. However, businesses that exceed the threshold or deal in taxable goods/services are required to register for GST.

By understanding these provisions and staying informed about the latest changes to the GST law, startups can avoid unnecessary fines and penalties while benefiting from the advantages of GST registration.

If you're unsure whether you need GST registration or if your business qualifies for exemptions, it’s advisable to consult our GST experts for personalized advice. Let us help you navigate the complexities of GST compliance and ensure your startup stays on the right track!

FAQs

Q. Is GST mandatory for startups in India?

Yes, GST is mandatory if a startup’s turnover exceeds the threshold of ₹20 lakhs. Other factors like interstate sales or selling through e-commerce platforms also necessitate GST registration.

Q. Why should I voluntarily register for GST?

Voluntary registration allows startups to claim input tax credits, improve credibility, and seamlessly expand into interstate trade or partnerships.

Q. Can freelancers operate without GST?

Freelancers with annual earnings below ₹20 lakhs (₹10 lakhs for special category states) are exempt from GST registration unless providing exempt services.

Q. Can I be fined for selling without GST on e-commerce platforms?

Yes, selling taxable goods/services without GST registration on e-commerce platforms can attract penalties.