The taxpayers in India have got a big relief ever since the government passed the new GST Act. With the implementation of the new GST Act, the cascading effect of various taxes has been diminished by the government to a greater extent. Thanks to the new GST regime based on the ‘One Nation, One Tax‘ concept, the Indian government has also added numerous taxpayers under their GST radar who have escaped till now due to the deficiency in the existing tax collection system.
Well, the most significant area where GST has contributed immensely is employment providing more and more opportunities to startups and entrepreneurs in the form of improving the ease-of-doing-business index, adding employment prospects, improving cross-border trade, and much more.
Now let deep dive into the major advantages of GST for Startups and Small businesses in India:
Much Improved Taxation System with Greater Transparency & Minimal Corruption
With the new Goods and service tax regime, the tax anomalies and inconsistencies such as multiple taxes, offline registration etc. have been completely obsoleted, resulting in more transparency in the new tax system. As a result, taxpayers can expect no unnecessary human interference and scrutiny against their tax filings. Everyone knows how difficult It was earlier for taxpayers to explain the complicatedness of their transactions to multiple tax officials starting from VAT, Excise, and CST to multiple other departments.
Such an extended and complex tax system was also more prone to the high prevalence of corruption, which in a way was a big headache for the business owners. Now, the GST has eliminated all these difficulties to a greater extent by making the entire process transparent paperless, and online helping startup businesses stay away from corruption instances and lengthy tax filing procedures.
The government has also identified a number of GSPs (GST Suvidha Providers) across India, helping taxpayers easily register for GST, tax filing, and stay compliant with GST.
Reduction in Compliance Cost for Businesses
The government has reduced the complexity of tax filing for businesses to a great extent by incorporating multiple taxes into a single tax GST. Now, startup businesses and entrepreneurs are not required to roam around multiple tax departments for assisting them in filing their tax returns properly. Although it is still a tax difficult for emerging businesses to understand the dynamic rules of the new GST regime; with time, everyone will be able to stay GST compliant.
Facility to Avail of Input Tax Credit
Earlier, when GST has not been introduced, it was a hell of a task for anyone to set up a manufacturing facility as it required extensive capital with multiple tax restrictions. Individuals or entrepreneurs looking to establish their manufacturing facility or company premise were required to pay large taxes on the purchase of machinery, furniture, and office equipment.
While, now, the capital needs still remain, the startups have the option to avail of the GST ITC on the taxes paid in advance. This comes as a big relief for companies who are just starting their business and have limited capital and funding from external sources to run important company operations smoothly. Now, the input tax credit received can be put back by startups into their business as working capital.
Reduction in Transportation and Logistics Cost
Before the new GST regime, the state governments applied their own different tax structure when it came to Octroi and CST applicability for interstate transportation of goods. Therefore, the implementation of GST can be considered a masterstroke by the central government in India and a welcome move for startups.
Now, as the GST has taken over the Octroi and CST along with varied other predominant tax requirements in different states, the tax has been reduced significantly for the movement of goods & services across multiple states. Due to the tax reduction, the overall logistics cost has also been reduced for startups making it easier for them to provide products across state boundaries.
Better Prospects for Business Expansion and Scalability
A lot of startups or entrepreneurial ventures before the new GST regime have been earned confined to keep their business operations in a particular state to avoid difficulties arising out of operating in multiple states as well as save taxes. This has significantly bent the expansion capability of entrepreneurial ventures and limited their overall client/customer base.
Now, with GST, startup businesses are no longer required to make multiple registrations for GST, if they sell their products in other states, enabling them access to a wider customer base. Although, having sub-branches or offices in multiple states still require the businesses to make separate GST registration for each state.
Simplified Taxation System
The taxation policy should be very simple to administer by the authorities and abide by the assessees. For the advantage of society and the economy, it is very prominent that the tax laws should work appropriately.
Under the GST scheme, which is based on the business process document on registration disclosed by the Government’s Joint Committee, anticipations are there that for gaining the benefit of the indirect tax registrations, there would be a standardized and centralized registration cell. By this, much of the time and effort can be saved for startups and resultantly they can focus more on their business concerns rather than tax compliance and administration.
When the proposed plan for “Startup India” was issued by the Industrial Policy and Promotion Department, the government introduced certain self-certification compliances and none of the supervision measures, though for a few beginning years by the specified labour and environmental laws authorities. The scheme was placed to settle down the regulatory burden on startups. GST regime should also be having similar provisions so that the initial burden regarding registrations can be further reduced. Moreover, there should be distinct resolution panels for solving disputes.
Business-friendly Tax
A business-friendly tax policy must be there for precise and clear administration. For the development and growth of startups in the country, it is anticipated that the GST would do something about this aspect. What a new entrepreneur need is to not have the burden of tax, disputes and difficulties while setting up the business. Fact, that these procedures and policies are so necessary, it is important too that the same should be followed at the ground level.
Read Also: Easy Ways To Reduce GST Compliance Costs for Small Business
To make this initiative an effective one, it is very important to consider this innovative idea to be executed properly. The real boost to the startups can only be done through a well-planned GST regime rather than an inefficient taxation model.
One Nation, One Tax, One Market
Pre-GST Era, an individual had to deal with several taxes such as excise, VAT, service tax and which could make the process complex and enhance the tax burden. However, after the implementation of GST, all indirect taxes are converted into a single tax which makes the calculation easier along with less paperwork. Startups and small and medium enterprises (SMEs) will be benefiting from the new indirect tax regime due to fewer compliance costs.
Ease of Doing Businesses with Single Registration
Under the previous tax regime, businesses had to register again and again which was very agitating for them. Post GST implementation, start-ups have to register only one time at the GST network and they will be able to do business in any state across India without facing any troubles.
GST Composition Scheme for Start-ups
GST Regime introduces an optional scheme with the name of GST Composition Scheme which permit startups and small businesses whose annual turnover is up to Rs.1 Crore are entitled to pay lower taxes in the new tax regime. This will automatically reduce the burden of taxes which are at the nascent stage. In the previous tax structure, the threshold limit of service tax was Rs 10 lakhs, whereas the threshold limit of VAT varies from Rs 5 lakhs to Rs 10 lakhs in several states. But now under the GST, the threshold limit has been increased to Rs 20 lakhs (Rs 10 lakhs in the case of North East and the Hill States). Apart from these, businesses whose annual turnover is below Rs 1 Crore is entitled to avail composition scheme levy at a lower rate.
Practical Challenges for Startups
Apart from the positive changes in legislative provisions, there are many ground-level realities that must be dealt with very carefully. For explaining the functioning of new business setups, certain practical challenges are to be faced by multiple tax authorities. As per the GST rules, it is expected that up to a large extent, the present state tax borders would be diminished.
Some of the advantages we can see under this aspect are:
- Goods can be transported efficiently.
- Storage and transportation costs will be reduced.
- The exclusive function of business requirements is only the supply chain.
Having a glance at the current Indirect Taxes framework in India, it has been found that there’s an obstruction of input credits. This causes high costs to be incurred for the startups. There are several non-creditable taxes like Central Sales Tax (CST), entry taxes, and luxury and entertainment taxes. Moreover, output service tax can’t be used as VAT and vice-versa. GST can resolve this to some extent. Tax costs would be cut down for the startups if there is an increase in credits. By this, they can price their products in a more efficient manner.
Additionally, it is a general phenomenon in India that there are state-wise warehouses for businesses. This is not only done because getting closer to the consumers but also allows buyers to utilize the credit. These add-ons credit VAT and other costs of operations to the buyers. Rather than having this inefficient tax schema, the GST regime provides more like a distribution model that is probably based on commercial concerns.
Final Words for GST Benefits for Startups Article
It is evident the implementation of the new GST regime in India has offered multiple tax benefits to startup businesses, but a fair share of disadvantages have also arisen for them. If we shed light on some of the disadvantages, then the list discloses complexities in claiming the input tax credit, multi-tier GST slabs, and deter in operational efficiency due to increased frequency of tax filing, which will take a reasonable amount of time to settle in.
Adding to this, the lack of working capital is still an issue for startups in India. Still, the new GST mandate can be considered a positive step taken by the Indian government in the wake of creating a fully automated tax system.
