With just a few days to the GST rollout, when India will wake up to a completely new tax regime, business owners are struggling to figure out the impact of GST on their businesses. More than big businesses, GST will have a major impact on the SMEs.
If you are a small business owner or plan on starting a business in future, here is a comprehensive guide on how GST will impact you.
Positive Impact of GST on Small Businesses
1) Ease of doing business: At present, a business has to get registered with various tax authorities, maintain many documents and file different tax returns to different authorities. In the current tax regime, people planning to start a business have to undergo a VAT registration with State’s sales tax department. This registration has to be done with each state where the business has to carry out its operations. Moreover, different states have different VAT rates, regulations and procedures. Post GST, there will be single registration and very less paper work. The business owners would now be able to focus their energy in carrying out productive business operations rather than complying with complicated tax laws.
2)Reduced logistics cost: On many occasions, you must have seen long queues of trucks at a state’s border. These trucks have to pay entry taxes or octroi every time they enter a state. These taxes are collected by individual states.The queuing up of trucks near the toll plazas to pay taxes to pass through the state leads to a lot of time wastage. Moreover, apart from octroi, CST is also levied on inter-state movement of goods. Truck drivers have to furnish documents relating to CST at the state borders. Many states do not supply goods across states due to octroi. GST will reduce logistics/ transportation costs and time to a great extent by replacing CST and octroi.
3)Expansion of business: Most small businesses restrict their business operations to one state due to inter-state taxes and complicated tax procedures. This limits their customer base to the state where they are located. GST will simplify the inter-state tax complications, reducing the cost of supplying goods across states. This will encourage business owners to expand business Pan India; thus, increasing their customer base.
4)Reduced tax burden: Under the current scenario, businesses with turnover of less than Rs. 5 lakhs do not have to pay the VAT registration fee. This limit has been increased to Rs. 20 lakhs under the proposed GST bill. This would reduce the tax burden on the SMEs.
5)Elimination of the distinction between goods and services: In the current tax regime, VAT is applicable to goods and Service Tax is applicable to services. However, post-GST, a uniform tax will be levied on both goods and services, making invoicing simpler. Businesses will be able to take advantage of the tax incentives in a better way. This will greatly reduce tax evasion.
6)Elimination of tax on tax(cascading effect): Cascading effect is a situation where tax is imposed on previously charged taxes. For example, a product on which excise duty has been paid can also be liable to VAT. Imagine a situation where a manufacturer produces a certain item for Rs.100. He charges excise duty at 12% and sells it to the shopkeeper at Rs.112. The shopkeeper sells the same item to a consumer at Rs.126 after charging VAT at 12.5%. Therefore, the VAT,which is Rs.14 in this case, has two components : VAT on the cost of the item (12.5% of 100) and VAT on the excise duty (12.5% of 12). The consumer has to bear this additional burden of VAT charged on the excise duty. GST will mitigate the cascading effect of tax as only one tax will be applicable.
Negative Impact of GST on Small Businesses
1)Missing Trader Problem:There is a concept in GST according to which, you’ll get tax credit only if the person before you in the supply chain has paid the taxes as well as filed the return. Even if one supplier in the supply chain doesn’t file the GST return, the next supplier in the chain will have to pay 18% tax on the value added by each supplier in the supply chain.This can affect the small industries badly, since at the small level, the profit margin is very less (say 5% or 10%). So, if you have to pay the entire 18% from your pocket, you might end up in a loss. Moreover, the government will receive taxes twice on the entire supply chain.Therefore, in order to prevent this problem, it becomes very important to check the vendor ratings. GSTN will maintain the vendor ratings. So, if a vendor defaults on paying taxes or filing returns, then his ratings will go down. Therefore, before going ahead with any deal with a vendor, make sure you check his ratings on GSTN.
2)Loss to freelancers: If you do not have a fixed place of business, i.e if you are a freelancer, then you have to register yourself as a ‘casual taxable person’ under the GST. In this case, the Rs.20 lakhs limit is not applicable. Even if you do not have a fixed place of business, you still have to register with GST. This rule is very harsh on freelancers.
3)Technological Challenge: A lot of startups don’t have the expertise to deal with the online systems. So, they might need the help of intermediaries to help them with the registration process. This will add on to their cost.
4)Reverse Charge Mechanism: Post GST, if your turnover is less than Rs.20 lakhs, you do not need to get yourself registered with the GST. If you are doing business with an unregistered dealer, there is a reverse charge applicable on the buyer i.e. he needs to pay GST on his purchase. He also has to issue an invoice for the purchase made by him from the unregistered seller. This invoice has to be uploaded in the GST system.
5)Harsh mechanism of ‘Input tax credit’: Under the GST, input tax credit can only be availed by the buyer if the supplier has paid the tax inside a given window. This is one of the problems which large percentage of startups will face in their lifetime.
6)Decrease in demand for goods: In the present tax system, the manufacturers have to pay no excise duty if their gross turnover is less than Rs 1.5 crores. However, post-GST this limit will be brought down to Rs.20 lakhs. So, the cost of goods and services will increase for the final consumers as the burden of this will be passed on to them. This might in turn, reduce the demand for those goods and services.
There are both pros and cons of the new GST bill. Some factors increase cost for businesses while some reduce it. But, in the long run, the positives will outweigh the negatives and will pave way for a unified national market.