One of the many benefits of GST is that it is aligned to benefit small and medium sized businesses. Normally, tax proposals at a macro level tend to benefit existing and matured businesses compared to start-up businesses. But GST, in that sense, is a lot more democratic. It not only offers special privileges for small businesses but also attempts to bring these unorganized players into the organized segment to give them sustainable advantages over a period of time. Here are a few ways in which the GST will benefit start-ups and small businesses in India…
One of the big barriers for small businesses to compete with larger names has been the difficulty in starting and sustaining any business in the Indian context. Be it approvals, compliance, multiple registrations or reporting; GST simplifies the life of a start-up in a variety of ways. Consider some of these instances. Currently, for a business operating in multiple locations you requires VAT registration in each state as well as a variety of state and local level permits. GST subsumes all these taxes. The entire GST requires centralized registrations and the entire process is online which not only is simpler but also leaves an audit trail and makes the process easier. Post-GST, the entry barriers to small businesses is largely reduced.
One of the big complaints that small businesses and start-ups have today is the plethora of compliance and regulatory requirements to adhere to. What the GST effectively does is to combine over 17 different central and state level taxes into the GST. The GST subsumes, inter alia, excise duty, VAT, central sales tax, service tax, entry tax, Octroi duty, entertainment tax, CVD, SAD etc. Thus, instead of multiple registrations, you can have one centralized registration for GST. The business can manage its entire tax department with a singular focus on GST instead of worrying about excise duties, CVDs, service tax, VAT, CST etc. A reduction in the compliance cost will be a big boon for small and start-up businesses which are mostly bootstrapped on a shoe string budget.
One of the underlying principles of the GST has been to reduce the layers of taxation and complexity for small businesses so that such entities can focus more on their core business rather than worry about compliance. To begin with, the annual turnover limit for full exemption from GST has been raised to Rs.20 lakhs, although the level has still been maintained at Rs.10 lakh in case of North Eastern states. This will keep a lot of start-up players and small units outside the purview of GST and focus on materiality. There is a catch here! If you are supplying goods or services on an inter-state basis, then you will be subject to GST irrespective of the size of your turnover. Secondly, there is a special composite scheme for select players in the manufacturing services sector, where the business unit or start-up can opt for paying a composite rate of around 5% tax and will not be liable for going through the GST compliance. Of course, once you opt for the composite scheme, the benefits of input tax credit will no longer be available to the business.
Cascading effecting is nothing but the dual taxes that businesses pay when they pay tax on inputs and also on the output. This has been a major drawback for many small businesses as that way they are not able to compete with the larger players. GST proposes to address this issue by opting for seamless input tax credit (ITC) in GST. There are two advantages for small businesses. Firstly, many of these levies like excise, VAT and CST are levied at different points and therefore credit is not entirely seamless. GST, once implemented, will overcome this problem. Secondly, the seamless credit transfer between goods and services is not happening today. That is because services are taxed by the centre while goods are taxed by the states and the centre. Hence input tax paid on services that are used to make the final product, are not available as credit on the final product. This makes the product uncompetitive and hits smaller companies the most. With GST, since all taxes come under a single umbrella, the ITC transfer between goods and services is also seamless.
GST, when fully implemented, will bring about a greater level-playing field between large and small businesses. Today distribution networks and logistical frameworks are designed keeping in mind the state level taxes and barriers. Under GST, the driving logic will be business needs. That means most small companies and start-ups will be able to run more efficient and lean distribution and logistics networks that can give them a big advantage vis-à-vis their larger counterparts. The ability to sustain a large and unwieldy distribution network will no longer be a USP for larger companies as is the case today.
Currently major ecommerce platforms like Flipkart and Amazon India require separate VAT registrations in each state and a plethora of compliances. For ecommerce companies there is a unique concept of Tax Collection at Source (TCS) that will be applied. Under the TCS, the ecommerce company will be required to deduct 1% of the value of the transaction value as TCS and deposit it into the coffers of the government. This substantially reduces the cost and uncertainty for the small businesses and start-ups; most of whom are looking to leverage the online platform to push sales. Of course, there is still lack of clarity over whether GST will treat all transfer of goods from godown to showroom as an inter-state sale and impose IGST. One only hopes that such minor issues will be ironed out.
The good news for small businesses is that GST will give then the benefits of simplicity and reduced compliance. Of course, the big benefit will be that they will get a level playing field in taking on the competition from larger players more effectively.