How GST impacts Startups

• Posted on Jun 3, 2018
• |
• By Leena Bhagchandani

The Goods and Services Tax (GST) introduced last year, came into effect on 1st of July, 2017. Implementation of GST is one of the remarkable events in history of India, since it wiped out all the indirect taxes levied by center and state. One common tax across the country- comes as a stepping stone towards development of economy. No change comes easy and same goes for the implementation of GST. For startups, like many other business, GST has boons and short comings both in it.

Impact of GST on Startups

• Starting up is easy:  Under the GST regime, businesses have to register themselves only once; instead differently with different states. This reduces their paper-work and compliance to a great level. In addition, registration is online and quick. It saves time and effort for legal obligations. Less of tax liabilities and more of business!!
• Target whole of the country: Elimination of state taxes reduces inter-state tax obligations. Start-ups can now target for customers across pan India under GST. Expansion and diversification of business is favorable.
• Low tax burden: GST favors the growth of small and medium business startups. Businesses with turn-over up-to 20 lakhs do not get under GST slab. This limit has been increased; as against up-to 5 lakhs under VAT previously.
• No distinction between Goods and services: Both goods and services are treated equally, making invoicing simpler for startups. Similar treatment is up-front with evolution of services in the economy.
• Logistics costs go down: Pre-GST, inter-state transportation required increased paperwork and time on the state borders for octroi. All this isn’t required under GST, saving logistics cost to a great level. Various e-commerce startups can now fasten their services with improved logistics.
• No cascading tax effect: Previous tax structures, VAT, had a cascading effect. Cascading effect refers to a scenario where tax is levied on the total value of the product at each stage of supply chain.

Such a tax structure is distorting the economy. GST eliminates this effect and each level of the supply chain receives an input tax credit. Each level therefore only pays only his/her share of the tax rate.

» Short-falls on GST

• Impact on cash-flows: Input credit is received only on sale of goods. In the above example, manufacturer has paid 5 rupees of tax and recovered the same from the wholesaler. Unless the wholesaler makes the sale and the retailer pays for it, wholesaler does not receive his input credit. This impacts the cash-flows of the business.

Furthermore, tax flow under GST requires each trader of the channel to abide his/her tax liability. If anyone defaults, the chain breaks and the succeeding level would bear entire tax burden.

Startups should be careful while trading with different vendors in order to prevent unnecessary tax liabilities.

• Technological challenge: GST reduces paperwork by making things online. One might fumble with steps and procedures to file returns and other obligations. Startups should invest some time in understanding procedures for tax compliance to avoid errors.

In conclusion, implementation of GST in a nutshell encourages startups and entrepreneurs for the growth of economy. It has its own rub though. Small businesses and startups might choose to install compatible systems at work for making taxation and other legal obligations simpler and quick.

• Posted on Jun 3, 2018
• |
• By Leena Bhagchandani
• |
• 1 Comments