The Goods and Service Tax (GST) bill is the single largest tax reform that India has seen in a long time. After much delay and roadblocks it is finally here and government will implement it from 1st July 2017. Indians have widely appreciated GST because it will make the tax regime less complex and also reduce tax burden in most cases for all the stakeholders involved. It is also a critical bill from the point of view of startups.
Startups should enjoy various benefits under GST. GST will greatly increase the ease of doing business. Earlier if a startup had to expand to a different state, there was a lot of paperwork to register with service tax, vat, etc. But now as it is already registered under GST it just needs to pay the relevant taxes. This will make expansion for startups far easier as they can solely focus on the business side of expansion and take decisions accordingly. They don’t need to worry about licences to operate in a new state.
The tax structure under GST is less complex which is a big benefit to startups. They won’t require big accounting teams to deal with the various types of compliance required by the government. GST will subsume numerous taxes under one head. Thereby removing different methods and forms to be filled which was required by the government.
In the short run, startups may face difficulty because while the different types of returns have reduced, the frequency has increased. Startups now need to file 3 GST forms every month that increases the workload. E-Commerce firms might face greater problems initially as they will have to file monthly returns along with quarterly returns also. E-Commerce firms will also have to follow TCS guidelines and collect tax on their sales and file returns for the same. However, once firms install automated software to help file GST returns it is going to be much easier than the existing tax structure.
Firms with turnover less than Rs. 20 Lakhs are exempted to pay GST whereas under the VAT regime firms with only turnover less than Rs. 5 Lakhs were exempted to pay GST. This should come as a boost to the SME sector. However, the increase in exemption might not be enough. Many SMEs cross this threshold and this boost might not be as great as it seems on first glance.
To put it into perspective after GST was implemented in Malaysia, there were widespread protests by SMEs for months despite having much simpler systematic requirements and higher level of exemption threshold. As a matter of fact the threshold limit in most countries is much higher than that of India. The threshold limit of a few countries are : Canada – Canadian $30000 (Approx 15.6 Lakhs) ; UK – 73000 pounds (Approx 61.32 Lakhs); Singapore – Singapore $1 million (Approx 4.8 Crore); Malaysia – MYR 500,000 (Approx Rs. 75 Lakhs).
Another critical aspect of GST which will impact startups is the input tax credit. In India , input tax credit will be available only when the supplier has filed the return. If the supplier files a wrong return or delays the filing of the return it will cause a delay in the input tax credit blocking funds for startups. Startups will face a greater impact due to less availability of capital and liquidity. Malaysia’s GST implementation showed that timely payment of input tax refund is vital especially to the startups. However, necessary technology infrastructure needs to be installed. Otherwise it could take months for credit to be passed hence blocking funds and increasing working capital requirements of firms.
GST will significantly benefit the Logistics sector which in turn will benefit the startups. GST will reduce the block in interstate transfer of goods which was earlier present due to different state taxation laws. According to research conducted by TCIL (Transport Corporation of India Limited), a truck in Europe or the US typically covers 700 – 800 kms a day as compared 300-400 kms per day in India. One of the main reason for the difference in distance covered is the presence of check posts and entry tax collection points on State Borders. GST implementation will remove these bottlenecks hence resulting in quicker transportation and lower cost.
GST will not only remove price anomalies among states but reduce the overall cost of the logistics and the product. According to a research conducted by CRISIL, GST could reduce transportation costs upto 20% for companies transporting non-bulk goods. This will enable startups compete with the larger players in the market. It will also prevent them purchasing and stacking in large quantities to get benefit of supply chain.
The startups involved in the manufacturing sector face a mixed bag when it comes to the implementation of GST. The expected improvement in efficiency of the logistics sector is a boost to the manufacturing sector as it makes it easier for timely procurement of raw materials and it also helps in swift delivery of the finished product at a lower cost due to reduced transport costs. However on the other hand it will increase the tax burden on the startups involved in the manufacturing sector. Earlier, manufacturing companies with turnover greater than 1.50 crore would pay excise tax. However, after the implementation of GST this limit is expected to come down to 20 lakhs therefore significantly increasing the tax burden on the businesses.
Overall, people expect the impact of GST to be positive on startups in general. It should encourage more people to take up entrepreneurship. With the implementation of GST, many of the current challenges faced by businesses would past. It will greatly improve the logistics sector within the country-enabling free transfer of goods throughout the country. GST will improve transparency, greatly simplify and reduce the number of compliance, making the process far easier for startups. GST will provide a significant shot in the arm for not just startups but all businesses and benefit entire economy.Add to favorites