The other side of GST – why it might not be startup-friendly

Now that all the hullabaloo around Goods and Services Tax (GST) making business, especially for startups, easy in India, has all but subsided, it is time we analyse the tax itself and its short-term impact on the startup environment. Is it really going to benefit the startup scene? Well, GST is not going to make things for startups easier. At least in the short-run. These are the reasons why:

Most of the start-ups in the country are providing services

Microeconomics 101 on complementary goods situation had the answer. With all things remaining constant, if the price of petrol goes up, the demand for petrol-fuelled cars will come down. Taxes have the same impact on business that are being taxed as well. Facing significant competition from China, only a tiny number of our startups actually focus on manufacturing. Every startup that has got funded has been ‘service-taxable’ or ‘VAT-eligible’, where the existing rates are much lower compared to the proposed GST.

The present rate of service tax is 15 percent and it is only suggested that GST rate could be around 18 percent. That means there will be a three-percent increase in the taxes that are to be paid by the service companies. This could only mean two things: either the price of the service goes up or the company absorbs this tax spike for a while. Around 80 percent of the startups, both in terms of revenues and count, in the country are doing two things: one, engaged in ‘service-taxable’ businesses and two, making losses.

Given the introduction of GST, startups would have to spike up their prices since they cannot afford to absorb more losses at the present scenario. Absorbing more losses would only mean worsening an already investor-dry case.

It is definitely not deniable that market might have the capability to absorb the excess three percent but, yet again, only time will tell.

The grey areas of State GST and Central GST

We should not count our chickens before they hatch. The Centre is working really hard to get the GST floated before April 2017. However, there is very little light on why and how State and Central GST legislations will pan out. Further, there is expected initial “give and takes” (read as procedures in control of State government).

Amidst politics of sharing revenues, how much should the company pay the State and to the Centre? Can the State GST be set off against the Central GST and vice-versa? If so, how much? Is there a limiting period? Will software be subject to GST? There are several questions that are still unanswered.

It is not going to be a central legislation completely driven by the Central government. And even little involvement of State governments to give whatever autonomy they require is sufficient to keep startups complying with State laws as well.

Transition to GST

Amongst other reasons, most Indian startups are tech creations because of the easier manoeuvrability around service tax laws, as opposed to manufacturing tax laws. Not to mention, it is easier to find a tech grad. GST is attempting to put them all in the same bucket. Less be told, it is not that easy. One can't put all these under a common umbrella when it is raining differently in different places.

There are nearly 15 legislations that govern indirect taxation of a manufacturing concern and GST is bound to have some amount of transitional provisions that are going to be quite tricky, if not herculean, to the existing startups.

But then, all new legislations have to fight the generation gap from their ancestor. Companies Act 2013 is still doing it. There are bound to be confusions and this process is going to breed new startups, especially the ones that are looking to raise money, spend some significant time getting their GST compliance and transition right before their prospective investors question on them.

Manufacturers have other headaches

The very word 'startup' is interpreted as ‘technological creation’. Why is there no Xiaomi or One Plus in India? The bureaucratic mazes built around several necessities for a manufacturing startup—like lower indirect tax and common registration, to name a few—discourages many from starting up in that industry.

To encourage startups in manufacturing, steps should be taken to ease the process of acquiring land approvals for industries, by making it easier for companies to export and by making these changes by not impacting nation’s agricultural productivity. Only then can these companies gain advantage of the new indirect tax legislation.

Needless to say, GST is bound to have its benefits. However, they all accrue in the long run. To get a perspective, service tax brought only two services under its ambit in 1994 when it was first implemented. At a point, with the abatement clauses in full swing, it was difficult to figure out the rate of service tax for each type of service. Today, we have a negative list regime. Every law takes time to mature. Startups will have to focus on implementation, overcome transition challenges and give necessary feedback to the legislators.

Disclaimers: Views expressed here are my personal reflections and not indicative of the views of my current or previous employers.

No part of this post maybe reproduced or quoted without prior explicit permission.

(The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)