The Goods and Service Tax has finally implemented the One Nation, One Tax regime across India for the supply of goods and services. The aim is to increase revenue collections by taxing goods and services at the point of sale. Every single enterprise including startups comes under the purview of the Goods and Services Tax Act. GST is expected to help in the growth of startups in India as it is meant to be beneficial for small and medium enterprises. Let’s examine the impact of GST on new startups.
Higher Registration Threshold – When the GST Act was introduced, it was mandated that a business with an annual turnover of INR 20,00,000 (INR 10,00,000 for special category states) or more should register for GST. With effect from 1st April 2019, these thresholds have been increased to INR 40,00,000 ( INR 20,00,000 for special category states). The threshold for service providers remains at INR 20,00,000 (INR 10,00,000).
Alterations to the Composition Scheme – The threshold for the composition scheme was raised to INR 1,50,00,000 ( INR 75,00,000 for the North Eastern States and Uttarakhand) in April 2019. All assessees registering under this scheme have to pay tax on a quarterly basis while returns have to be filed annually. Service providers and mixed suppliers of goods and services with an annual turnover of up to INR 50,00,000 can opt for a fixed tax rate of 6% (3% CGST+3% SGST). This gives new startups some relief in the form of lower tax slabs till their annual turnover crosses the threshold limit.
Benefits of Tax Credit on Purchases – Startups which are registered under the service industry pay service tax. Under GST, they can get an input tax credit on the VAT paid on purchases including service tax. This benefits new startups by improving their cash flow. For example, businesses couldn’t offset the VAT paid on purchases with the service tax on sales under the previous tax regime. If they were paying 15% service tax on sales of INR 100,000, they had to pay INR 15,000 without getting any offset for the purchase of office supplies of INR 50,000 on which they paid tax of 5% i.e INR 2500. Under the GST system, if they pay INR 18000 as GST on sales (18% on INR 100000), they can get an offset of INR 9000(18% on INR 50000) which means they pay a net of INR 9,000.
Benefits of improved logistics – Inter-state movement of goods was a messy affair prior to GST and companies had to maintain multiple warehouses in different states to avoid state entry taxes. This can be eliminated with the introduction of GST which makes the supply chain more efficient and cost-effective. Startups can focus on strategically placed warehouses in the main cities and derive more value from the supply chain.
Benefits of Digitisation- The GST Act has streamlined the entire process eliminating the need for physical visits to the Tax office for registrations or filing returns. The entire process can be completed online through the GST website. Registration for GST, payment of tax and filing returns can all be completed online without wasting time and effort. This can result in considerable cost and time savings for startups.
Benefits for Online Businesses- The establishment of the GST Act has been a boon for digital startups as they can conveniently sell their offerings across the country without the need to follow the VAT laws laid down by individual states. The new GST setup democratizes the tax regime and makes life easier for e-commerce startups.
Additional operational costs – A lot of professional expertise is required to remain compliant with the various GST laws and file returns regularly. As a result, startups are required to bolster their accounting function resulting in more operational costs.
StartUp Movers is a professional services organisation that helps new business enterprises handle accounting, legal and tax compliances. Businesses can get in touch by calling 7011808002 or visiting https://www.startup-movers.com/