Masters India

Impact of GST on Startups

Sakshi Jain
Sakshi Jain at March 14, 2023

The GST will fuel the economy in a big way in the long run, by bringing a stupendous increase in the revenue collected through it and India will rapidly move towards being seen as a “developed” nation. India, as the biggies define it, is still a developing nation, but it is doing so at a supreme pace and a lot depends on the survival and progression of the start-ups and the SMB sector. Our honorable prime-minister, Mr. Modi is all sold to the empowerment of the SMB sector and the start-ups find a central place and consideration in his speeches.

While the GST is rolled with a harry audacious goal of simplifying the taxation and strengthening the Indian economy, the initial impact [first 12 months] of GST on different sectors will vary, depending on the change in the tax slabs and various other indirect factors. However, the start-ups will get enough oxygen and should be able to thrive and flourish as the GST enfolds. The GST will overall act as a catalyst for the start-ups and will be a major boon to small and medium enterprises. Having said that, there would also be some barriers and bottlenecks which the industry will face. The article aims to apprise you of all such pros and cons of GST on start-ups to enable you to make an informed decision.

1. Pros

  • Simplify starting of businesses
  • Expanded markets
  • Higher exemptions and reduced tax liabilities
  • Enhanced logistics and faster service deliveries
  • Consolidation of multiple taxes
  • Financial Inclusions

2. Cons

  • Confusion in registration
  • Theory of ‘casual taxable person’
  • Restrictive composition levy
  • The ruthless reverse charge mechanism
  • Technological restrictions
  • Blocked working capital
  • Compliance parameters


Impact of GST - Pros:

Simplify starting of businesses:

The new consolidated GST and its unique centralized nature has eliminated all the earlier hurdles and hassles of enrolling with a plethora of different indirect taxes of both central and state, only easing the process of beginning a new venture by allowing a single registration applicable to PAN India. Since startups lack the resources to hire tax experts or a dedicated team for handling varied forms of tax compliance, the objective of GST is to simplify the tax regime by reducing the multiplicity of taxes. This will not only bring compliance costs down but also make taxation transparent with digital tax processing. This truly is encouraging, as the previous regime was horrifying in nature for the entrepreneurs since the complicated taxation intricacies of starting a business gave them goosebumps.

Expanded markets:

The one nation – one tax has opened up all of India like never before and created a level playing field for everyone. Earlier SMBs used to limit their reach within the state fearing the burden of tax and other complexities on interstate sales. The GST has eliminated this fear and transfer of tax credit [irrespective of the location of the buyer and the seller] in the new regime will encourage the entrepreneurs to look beyond the narrow intra-state business,

Higher exemptions and reduced tax liabilities:

The Composition scheme is formulated with the sole objective of supporting the start-ups and empowering the small businesses with an annual turnover between 20 lakhs and 75 lakhs to pay lower taxes. Earlier, as per the Value Added Tax (VAT) structure, any business with a turnover of more than 5 lakhs was to compulsorily get a VAT registration. Under GST, this threshold for registration has been increased to 10 lakhs in a few states, 20 lakhs, and in some cases even 40 lakhs, thus providing a breather for founders of many start-ups and small businesses.

Enhanced logistics and faster service deliveries:

GST does not have any provision for ‘entry tax’ for the goods manufactured or sold in any part of India leading to expedited delivery of goods at interstate points and toll checks. A CRISIL report suggests that the manufacturing costs of bulk goods will be reduced enormously, resulting in a boost of e-commerce endeavors.

Consolidation of multiple taxes:

The cost of compliance, complexities of multiple taxes and tough inter-state movements have all come to a full stop. The singular centralized taxation consolidates the majority of the previous taxes and cuts down the ultimate load on the taxpayer.

Financial Inclusions:

The digital bookkeeping and the GST Compliance Rating will enable the newbies to fulfill eligibility criteria to avail credit facilities and will attract more investors in the light of transparent, sound and authentic e-data. In the long run, FinTech organizations and venture capitalists will have easy access to the young and fast-growing ventures digitally and confidently partner with them, in the light of visible authentic history.

Impact of GST - Cons:

Confusing registration:

The GST laws state that any business with an annual turnover of 20 lakhs [exempting northeast states, where this threshold is 10 lakhs] or more is required to register for GST and gives an impression that anyone below the mentioned limit is exempted from registering.

But, any venture, if making any inter-state transaction is required to register for GST and file returns, irrespective of his annual turnover being below 20 lakhs. The distance of the inter-state is immaterial and could be as close between Noida and Delhi.

Restrictive composition levy

Though Composition Scheme is aimed to empower the smaller businesses [20 LPA to 75 LPA], it prohibits the availing of input tax credit and also the collection of any tax from the recipients. While the GST rate [1% for manufacturer, 5% for a restaurant service provider and 1% for other suppliers] for composition scheme is considerably lower than that applicable for a regular normal taxpayer, if one were to take into account the restrictions imposed, it would appear to bring such taxpayers back to square one. The composite taxpayers would be deprived of the inter-state business and cannot sell through e-commerce, since GST needs e-commerce to operators to collect TDS.

Blocked working capital:

The new generation taxation mechanism would need to uphold funds in the electronic form with the tax department leading to a blockage of the capital. Additionally, the input tax credit mechanism will also lead to choked capital. All in all, the businesses would have to part with a portion of their working capital funds [without the benefit of interest] under GST.

Compliance parameters

A numerical figure [GST Compliance Rating] will guide your prospective buyer to decide upon your credibility with the government much like the personal credit score these days. Businesses will do everything to get and keep a ‘good’ score, which is not that easy, seeing the stringent online micro guidelines not only about entering the data but also about payments. The ‘good’ credit score would come at a cost of specifically deployed bandwidth and funds.

Technological restrictions:

GST being a 100% online module will need skills and precision to achieve the level of accuracy needed for obtaining a high GST Compliance Rating and will also have to depend upon the intermediaries [GSPs and ASPs]. Such recurring services would certainly hit the bottom line profitability of the startups and the SMBs.

The ruthless reverse charge mechanism:

If a small businessman, who is exempted from GST supplies to a GST registered entity, the buyer is liable to pay GST on such a purchase by self-invoicing and this invoice is to be uploaded at GSTN while filing returns. Such a cost is basically bad debts for the purchaser.

Theory of  ‘casual taxable person’:

Anyone who intermittently transacts [goods/services/both] in the course or continuance of business, whether as a principal, agent, or in any other capacity, in a state or union territory where he has no fixed place of business, also needs to register for GST. Other than the GST, such an entity would also have to pay taxes on an estimated basis, while applying for registration.

From an eagle’s eye view, the GST aims to simplify and enhance transparency with digital tax processes. For the start-ups, a DIY [Do It Yourself] model is also deployed [although with restricted functionalities], which will enable the newbies to register, submit returns, pay taxes and claim returns online. This will be advantageous for all sorts of start-ups irrespective of any sector.

Vijay Shekhar Sharma, Founder and CEO Paytm, sees this as the most influential and tsunami-ed move in the tax domain since independence – all for good only! He clearly foresees, the new simplified tax structure would address, interstate supply chain issues and instigate new markets.

Ambareesh Murthy, Founder, is optimistic about it, for the transparency and simplicity it embeds.

In addition to these accruing benefits, a CRISIL analysis report states that GST is going to play an intricate role in boosting country’s GDP and reducing the fiscal deficit. It creates a win-win situation both for the government and the taxpayers. Notwithstanding speculations and the initial teething problems, GST appears to be a promising radical reform that ensures reduced costs and a better-streamlined economy; elements that are essential to guarantee success, to lift the spirits and to empower Indian entrepreneurs.

If you are a start-up or an SMB or perhaps a conglomerate, you would certainly like to bring on board a technical and technologically qualified team of professionals, who would hijack all your taxation worries and inject the best GST automation solution in India. autoTax from Masters India easily integrates with your accounting systems / ERP and instantly make you a GST-fied organization.

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