GST is the biggest tax reform in India after Independence. We have taken almost 60 years to pass a tax bill in which a uniform taxation system will be implied to all over the nation.
We are people of a developing nation with lots of startups and small-scale industries. In this scenario, there are a series of different types of taxes and rules. These are hurdles in the way of becoming a developed nation. Currently, in general, a small-scale manufacturing company pays Excise, VAT, and Service Tax, all three types of taxes, and that’s why the rate of tax for all three combined goes around 25% but after GST implementation, it will come down to 18% which will provide great relief to these companies.
In the 22nd GST Council meeting held on 06 October, it was decided for the SME sector that the organisations with a turnover up to 5 crores will have to file GST returns quarterly and not monthly basis. The relaxation is provided based on the turnover, as the tax obligation is far less according to the tax compliance in the sector.
Favourable Impacts of GST on Startups or SMEs
- Ease of starting a business by bringing uniformity in the centralised registration process.
- An easy regulatory mechanism will bring out benefits not only to new-age businesses (Eg, e-commerce) but also help to attract more foreign investment from the global market.
- Higher exemption to new business by extending the limit up to ₹20 Lakhs (₹40 Lakhs for suppliers of goods in most states), which will bring down the tax burden to newly established businesses.
- GST will make the process of paying taxes simpler by merging all taxes of different states.
- The composition scheme attracts lower tax rates on the limit between Rs. 1.5 crore. It would be a plus point for newly established businesses and existing SMEs.
- In GST, there is no difference between sales & services, and thus tax will be calculated on a total basis.
- GST will reduce the logistics cost of the company producing non-bulk goods by 20%.
- GST eliminate the cascading effect of multiple Central & state taxes.
- GST is a destination-based tax system, i.e. the liability to pay tax is only generated after the goods/ services reach the customers.
- GST bring down the fiscal deficit, boosts GDP & brings economic integration into the country.
- GST is levied only at the point of sale & not on the purchase i.e. levied only by the last dealer, and makes the product cheaper for the final consumer.
- GST is about to create a unified market by cutting the cost of various taxes imposed by the central and state governments
- According to CRISIL, GST is reducing the time-consuming process, and it will benefit 20% in logistical costs for companies that are making in bulk. The reduction in logistic costs has also increased the faster delivery
- In previous tax laws, various input tax credits were not available for set-off; after GST implementation, this problem was resolved.
The inclusions from the Traders Association Confederation of All India Traders also pointed out that GST will surely increase the compliance policies and structural working of the business units worthwhile but the building of the framework online and creating knowledge and awareness may prove lacking in the case of small business units.
Unfavourable Impacts of GST on Startups or SMEs
- The registration on multiple stages can be an issue if the business is doing business with multiple states, because it is now mandatory to register with each state you are doing business with.
- The monthly return filing procedure can create problems for businesses as they have to comply with it else they will be burdened with a Rs. 100 per day penalty, which is not favourable even for their compliance rating on the portal
- As there are many returns to be filed in a year, to cope with the system, they have to hire an accountant or ask a third party to do the return filing work. So, the burden of return filing can increase the cost for businesses
- For e-commerce operators, it became more complicated because they don’t have any threshold limit to be exempt from the law, and they have to register and track the supply of each good
- As SMEs have to pay tax first, then they will get the returns; they have to defuse additional funds in advance till they get the returns
- The refunds totally depend on successful exports, so SMEs now have more burden to depend on the supply chain for input tax credits, and this is creating massive interdependence between SMEs and the supply chain
- SMEs dealing with supply to end-users can face the burden, as there is no tax exemption for the supply of goods under input credit, and it will increase the cost of the product
- It can create a mismatch in society as there are some taxes on luxury goods and normal goods; it can make the rich richer and the poor poorer
- There is variation in the demand-supply ratio due to increased raw material costs. So it is expected that the profitability and debt ratio for SMEs can be burdened if they are not able to overcome the tax burdens. The last resort for SMEs is to increase product prices so that they can resist the overload
- According to R. Vasudevan, business head at CRISIL, Organised Sectors are showing a positive response to GST compliance and transition but unorganised sectors will need more time to adapt to the new GST laws.
Goods and services tax is approaching and will create a long-lasting impact on the MSME sector due to various factors:
Stringent Compliance
The MSME sector is believed to climb the growth stairs pretty fast in comparison to other organised sectors, as the low-cost structures sustained by the tax-evading and implementing multiple venture registrations to trespass tax limits prevailed earlier. All these points are major in the sharp pricing of products and maintaining operating margins very closely with the organised players of the market.
But now, the GST is set to scrutinise the sector by imposing threshold limits of 20 lakh for the manufacturing units, which will ensure that the maximum number of unorganised MSME players come into the tax net. The digital mode of the transaction becomes compulsory, which will further authenticate the invoice under the GST. This will make tax compliance tighten the knot.
Service Sector Influence
The organised sector will have to tackle with increased tax burden, but it can cope by holding the pricing aspect can pass the burden to the customers and will be able to improve the pricing strategy. In the case of MSME, it is supposed that a simple tax framework will be applicable, making an overall improvement in the sector, pushing it to reach wider. The sector will see promising growth in the current fiscal according to the reports based on Crisil SME ratings.
The central government has done great work for the general public and the state government, as it has continued various development work in the startup sector. A lot has been done for the startup and emerging industries in the tax part. Previously, the government taxed the start-ups on as low as 5 lacs revenue, but now it has been increased to INR 20 lac with a composition scheme of 1.5 crore and above. The industry will benefit from this move as India is a place of the everyday new startups.
And according to the new GST scheme, the input tax credit can be availed, which is a lot more healthy for a business to grow from its own revenue. The factor that was earlier paying a lot of VAT input in the service tax will have a lot more ease of doing business in multiple regions, while extending the base of business across the nation
From the previous demonetization move, the digital era tried to push the mainstream line of transactions, but now it is an integral part of the economy, creating more and more jobs and Ventures out of the digital and online genre, healthy options.
Overall, the GST is making a positive impact on the growing and budding sector that is startups, needed for innovations and development. This is a great time to initiate new Ventures out of ideas to develop them into a fully grown revenue-generating opportunity.
Definition Change of MSMEs Under GST
In the latest round of amendments, the MSMEs are now considered to be evaluated based on the annual turnover, with certain changes to the brackets. From now onwards, the micro-enterprises will be classified when they come with an annual turnover of INR 50 million (or ₹5 crore).
Also, small companies will be considered when they have an annual turnover of INR 50 million to 500 million (or ₹5 crore to ₹50 crore). For the medium enterprise classification, it would be considered when the bracket of 500 million to 2.5 billion (or ₹50 crore to ₹250 crore) annual turnover comes as an annual turnover.
