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Goods and service tax or GST will be one tax to subsume all taxes. It will bring in “One nation one tax” regime. Analysis of the impact of GST on startups shows that they will stand to enjoy the benefits of GST.
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 1 crore though its optional. It is called the composition scheme. This will bring respite from tax burdens to newly established businesses
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 20,000 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. 1,000 VAT already paid on stationery. Under GST (assuming GST= 18%)
|GST on service @18%||9,000|
|Less: GST on office supplies (20,000*18%)||3,600|
|Net GST to pay||5,400|
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.
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.
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.
Also as per 22nd GST Council meeting of 6th October 2017
This means that the burden of tax compliance is considerably reduced for smaller businesses.
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. All these differential treatments and confusing compliances will be removed in GST. Read here for impact of GST on e-commerce.
The logistics industries in India had to maintain multiple warehouses across states to avoid the current 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 will unite India removing restrictions on inter-state movement of goods. This will bring warehouse consolidation across the country.
As an outcome of GST, warehouse operators and e-commerce players have already shown interest in 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 will increase profits for startups involved in supply of goods through transportation. Read here to read about impact of GST on logistics.
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.
However, once GST gets implemented, most of the current challenges of this industry will be a story of the past. India will become one single market where goods can move freely and there will much lesser compliances to deal with for startups. Thus, GST is a completely new tax regime already taking India by storm. Businesses, especially startups, will face challenges in transition and application of GST.
An edited version of this article has also been published in BW Disrupt.