The news headlines have been glittered with the GST talks and the changes it can bring to the acche din of India. And alongside this it has aggravated the insecurities of the risk it carries and one such insecurity is with respect to the entrepreneurs starting their journey in the business world. Hence this article will try to provide the perspective of GST for the startups.
But first thing first, what is GST and why is it so celebrated?
Both these answers are interconnected. GST stands for Goods and Services Tax i.e. the indirect taxation arena and is so celebrated due to the present taxation law that includes Sales, Service, Excise, Value Added Tax and many others quite literally. The former applies the rule of single taxation and the latter breeds on chain taxation.
In simpler terms the difference between the two can be summarized in the shopping and restaurant’s bills. Did it ever happen to you that you get shocked to see the amount of service tax added to your bill or let alone the price of a packet of chips? Well that is the scenario with the indirect taxation system of India. For every commodity you purchase is taxed every time it leaves the factory- raw materials, manufacturer, wholesaler, retailer, exporter and so forth. So your final bill includes the tax on each of this stage plus the tax on these taxes. It’s like compound interest where interest is charged on the outstanding interest. But what GST does is this, it carries forward the tax paid at the earlier stage and get subtracted for the next stage and so the amount of service tax paid is on the addition made at that stage only.
The point of interest is that this is surely helpful in decreasing the price of the goods and services and hence the consumer but how will it affect the businesses involved. On a foundation level it will not only decrease the tax liability but also the cost price of the product.
The second reason of the celebration is the simplicity it poses. The regime of indirect taxation was heavily complicated due to the large number of indirect taxes and confusing due to the state and central involvements. This is solved by the scrapping down most of them into one and by clearing demarcating the state and central powers.
Now the second point, why is it helpful for the startups? Due to the special privileges embodied in the bill for entrepreneurs which could be the nexus of the present government’s policy of encouragement of home business. And this encouragement can be seen in the form of exemptions provided to businesses with revenue of 10 lacs and less compared to the present 5 lacs. Additionally the presence of lower tax slabs for businesses with revenue of 50 lacs and less.
The second show of this encouragement is in the form of the single licensing process. The headache of getting different licenses for different purposes in different states had been eradicated in this new bill and this is golden opportunity for startups because of the preexisting lower probability of a new business to get a license as against an established one due to the innumerable reasons ranging from money to power.
Now the third point, what are the common benefits provided to businesses? This answer lies in the characteristics of the new taxation regime proposed by the GST Bill.
The very first is the common taxation for both sales and services which will make it easier for businesses providing both goods and services and the extended version of this is the single return rule wherein almost all the indirect taxation will be paid under the same umbrella of GST unlike the current situation.
The second major characteristic affecting the life of the businesses in India is the cost reduction of interstate trade which will be of a special help to the e-commerce companies as this will reduce their shipment charges. This game changer is because of the single taxation policy of destination principle .i.e. the tax will be charged only on the destination and not on every checkpoint and state entry.
The million dollar question, how can it harm my start up? Well GST has its own ways of killing a start up. First comes the manufacturers who were exempted to the tune of 1.5 crores in the existing excise laws but can now be reduced to a turnover of 25 lacs only. The second in the line are the e- commerce businesses who with GST will have to pay their taxes every month and quarterly too. The third is the food industry and this is due to the ambiguity present in the law related to mandi tax. And lastly, everyone is in the risk factory since the GST rate is not declared at all and in addition to this is the will of the state to legislate GST- when and at what rates?
The analysis of the bill and the consequences it follows attracts the needle of the balance on the positive side for the startups because of three reasons- ease in doing business, simplicity of law and improving the fiscal deficit.