Impact of GST on Startups- Startups Stand to be Benefited by GST

From just 500 recognised startups in 2016 to over 1.59 lakh certificates issued by the Department for Promotion of Industry and Internal Trade (DPIIT) as of 16 January, 2025, India’s startup ecosystem has experienced tremendous growth. While government initiatives like Ease of Doing Business and Make in India have created a favorable environment, this rapid expansion would not have been possible without the introduction of the Goods and Services Tax (GST). 
Startups have long struggled with navigating a complex, multi-layered indirect tax system—GST has played a key role in simplifying this landscape.

Available GST Exemptions for Startups

GST Registration for Startups

Before GST, any business with a turnover of more than Rs 5 lakh was required to register for Value Added Tax (VAT) and pay VAT (different in different states). Under GST, the registration threshold is ₹20 lakhs for service providers and ₹40 lakhs for businesses dealing in goods, thus exempting many small businesses including startups.GST offers an optional composition scheme for small businesses with turnover between ₹20 lakhs and ₹1.5 crore, allowing them to pay tax at a lower rate.

However, startups in the manufacturing sector do face certain challenges. Under the previous excise laws, only manufacturing businesses with a turnover more than Rs 1.50 crore have to pay excise. But, with GST in place, the turnover limit has been reduced to Rs 40 lakh thus increasing the tax burden for many manufacturing startups.

GST Refunds and Input Tax Credit (ITC)

A lot of startups are into the service industry i.e., they pay service tax. Under the GST regime they can set off the tax paid on the purchases (say office supplies) with the output tax liability on their sales which they cannot under the previous regime. For example: A startup buys office supplies of 20,000 paying 5% VAT. 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. 1,000 VAT already paid on stationery. Under GST (assuming GST= 18%)

Thus it is a big boon to the startup industry who are mainly providing services as it results in reduction of costs thus increasing working capital to the already cash-strained startups.

Benefits of GST for Startups

Simplified Online GST Process

The entire GST process starting from registration to filing returns and payment of GST tax is online. Startups do not have to run around to tax offices to get various registrations under Excise, VAT, Service tax.

Reduced Compliance Burden for Startups

Startups often work on tight budgets and cannot devote resources to look after the various tax compliances. GST has subsumed most of the taxes thus reducing the time spent for tax compliances. Also, startups dealing with both goods and services find it much easier to file and pay one GST tax instead of both VAT and service tax.

Elimination of check posts, tolls and border inspections

Technologically innovative startups tend to have a huge presence online. GST is applicable all over India so there is no complication for inter-state movement of goods. Earlier, states had 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. All these differential treatments and confusing compliances stands removed in GST. Read here for impact of GST on e-commerce.

Enhanced Logistics Efficiency and Cost Savings

Earlier, the logistics industries in India had to maintain multiple warehouses across states to avoid the Central State Tax (CST) and state entry taxes on inter-state movement. There have been cases where warehouses have to operate below their capacity thus increasing operating costs. GST unites India removing restrictions on inter-state movement of goods. This brings warehouse consolidation across the country.

As an outcome of GST, warehouse operators and e-commerce players consider setting up their warehouses at strategic locations such as Nagpur, which is the zero mile city of India and is well connected. Reduction in unnecessary logistics costs increases profits for startups involved in supply of goods through transportation. Read here to read about the impact of GST on logistics.

An edited version of this article has also been published in BW Disrupt.