GST Impact on Micro Enterprises and Startups

The GST law has been in talks for many years, but it’s only now that it’s finally going to be implemented in the nation from July 1. The business industry awaits this day, although there is still a lot of confusion and uncertainty.

Regardless of how everyone feels about the new taxation regime, one thing is for sure that it will be beneficial for the businesses and the consumers both. However, startups and micro-enterprises are going to be at a big advantage because of the following:

Starting Business Made Easy

Under the current system, the troubles for startups and small business owners begin from the first step itself, which is registration. The business owners have to pay a number of visits to the Sales Tax department for VAT registration. Also, if the business has multiple branches in multiple states, then getting VAT registration can easily become a nightmare due to different rules and regulations followed by different states.

GST is here to change all the problems mentioned above. It is a centralized system that will allow aspiring entrepreneurs to register their businesses online. They can also file returns, claim input tax credit, send invoices, etc. through their GST account. Thus, there will be less room for corruption and tax evasion.

One Big Central Market

A mobile phone of a particular model is today sold at a different price depending on which state you buy it from. This is because the rate of VAT and other taxes can vary in different states under the current system. The brick and mortar stores have thus suffered a lot due to this as they are unable to match the prices of the products sold in the states that have lower tax rates.

These businesses don’t only have to compete with other businesses that could afford to offer low prices but also with imports that often cost less due to the lack of cascading effect of taxes. Thus, GST will promote the growth of domestic companies and startups to do business without fearing the businesses based overseas.

For the most part, GST will be helpful for SMEs and startups. However, there will a few challenges too. For starters, businesses that supply both goods and services and have an annual turnover of less than 1.5 crores may have to face compliance issues due to the nature of their business and deal with both state and central administration. Also, the threshold level for GST registration is 10 lakhs for the North-Eastern States and 20 Lakhs for the rest of India. Although this is better from the previous 5 lakhs and 10 lakhs respectively, it will still cause startups and small businesses owners to pay a high tax.

All in all, while there are a few hardships that GST will bring to the table, it will be a welcoming change for the entire business industry nonetheless. The specifics of the law such as exact rate for different product and service categorized, however, will be finalized by the GST council soon.

Types of GST Returns, and Their Applicability to your Business

The Goods and Services Tax, i.e. GST is going to completely transform the Indian business industry. From improved transparency to the elimination of double taxes there is a slew of welcoming changes associated with the new regimen. However, not everyone is liable to register under then new GST scheme. If your annual turnover is below the threshold, then you don’t have to register for GST, but rather a separate branch under it, which is the composition scheme.

The following are some of the key points you must know about the GST composition scheme:

Eligibility

The GST council has released a threshold limit to decide which taxpayers should be allowed to come under the composite scheme. If your annual turnover is below this limit then you can opt for the composition scheme.

The following explains the threshold limit:

For North East India, Uttrakhand, Himachal Pradesh, and Sikkim: The aggregate turnover of all the business verticals that come under then same PAN should be above Rs. 10 lakh for the preceding financial year but not higher than Rs. 50 lakhs.

For the Rest of India: The aggregate turnover of all the business verticals that come under then same PAN should be above Rs. 20 lakhs for the preceding financial year but not higher than Rs. 50 lakhs.

Input Tax Credit

A businessperson under the GST composition scheme cannot claim Input Tax Credit. This is one of the biggest drawbacks under this scheme. So, the merchants who are registered under regular GST regime will be able to offer lower prices on the same goods as yours by being able to claim a portion of the tax paid by then though ITC.

Tax Rate

Now, this is where you will be able to get a benefit over the regular GST merchants. The rate of tax levied under then GST composition scheme will be less than normal GST. However, it will still be at least 1% of the turnover of a financial year. The actual rate is expected to fall within 1% to 3%.

Voluntary Registration

To avail the benefits of the GST composition scheme you will need to register yourself on a voluntary basis, and that too every year. If your annual turnover crosses the threshold i.e. Rs. 50 lakh during any financial year you will automatically become liable to register under then regular GST scheme.

Note: If you are already working under the current VAT composition scheme then also you need to register under the new GST composition scheme on a voluntary basis.

Nature of Supplies

Only those merchants who supply within the same State can avail the benefits of the GST composition scheme. Thus, if your supplies are inter-state based then you don’t qualify for GST composition scheme.

Frequency of Returns

Normal taxpayers under the regular GST scheme have to file monthly returns via forms GSTR-1, GSTR-2, and GSTR-3. However, since the main objective of the GST composition scheme is to provide simplicity and ease in tax calculation, as GST composition merchant you will just need to file returns on a quarterly basis i.e. once every four months in a financial year.

Bill of Supply

The normal taxpayers under the regular GST scheme have to issue tax invoices. However, since GST composition dealers can’t claim tax inputs they have to issue a bill of supply instead.

Full Applicability

If you operate multiple businesses, then under the composition scheme you are not allowed to levy composition tax on some businesses and skip the rest. So, for instance, say you run a mobile store, a computer hardware store, and a snack bar, then the composition scheme will be applicable to all three of them. If the three businesses fall under then same business PAN they all shall be covered under the composition scheme whether they are being operated within a single state or interstate.

Moving from Composition Scheme to Normal Scheme, and Vice Versa

Situation 1: When you become a composition dealer from a regular dealer

If you are a composite tax payer then you need to pay tax at a rate not more than 0.5% for other suppliers of turnover, 1% for a manufacturer, and 2.5% for the restaurant sector. You also cannot:

  • Claim input tax credit of GST paid to you suppliers.
  • Supply goods through an aggregator (any e-com company such as Flipkart, Amazon. ).
  • Do business through a supply of services.
  • Manufacture some specific types of goods as notified by the GST council.
  • Supply goods that can’t be taxed under GST.
  • Collect tax on your outward supply of goods.

Situation 2: When you become a regular dealer from a composition dealer

When your annual turnover exceeds the threshold and you become liable to register under regular GST, you also become eligible to claim input tax credit.  However, you must claim it within 30 days from the date you become liable for GST registration to avail the benefit.

For a better understanding, consider the example below.

Let’s say that you are a manufacturer of blankets and have crossed the threshold limit for GST registration on 5th November 2017. You have raw wool in stock worth Rs. 2 lakhs and have paid a GST @ 18% i.e. Rs. 36,000 on it. So, you must apply for GST registration before 5th December 2017 (within 30 days) if you want to claim the ITC i.e. Rs. 36,000.

Returns to be Filed by a Composite Tax Payer

Filing returns is much easier and simpler for composite taxpayers in comparison to the regular taxpayers under then GST regime. In the former case, you just need to file an annual return and a quarterly return, or a total of five returns per year. The following table offers the details associated with these returns:

Return Form Frequency Due Date Details to be included
GSTR-4A Quarterly NA This form will be prefilled/auto-populated with the details provided by your supplier via form GSTR-1
GSTR-4 Quarterly 18th of the next month Details of all the outward supplies of goods and services along the prefilled details of the form GTSR-4A. If there are any changes required in the Form GSTR-4A then you can also add those in the Form GSTR-4.
GSTR-9A Yearly 31st December of the next financial year Combined details of all the quarterly returns along with the tax payment details.

 

 

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How will GST Affect the Small Businesses?

The Goods and Services Tax, which is better known by GST, is being advertised by the government as one of the biggest tax reforms in the history of the Indian economy. However, even though it seems promising with its simplification of the current taxation structure and elimination of double taxes, etc. it is important to know how it’s going to impact the SMEs of India.

Ease of Doing Business

Under the current system, every new business has to get a VAT registration from the sales tax department. Thus, if you are doing business in multiple states then it can be a big hassle to deal with the different registration process and associated fees, etc. of these states. Since the VAT applicable on a certain product can also vary from one state to another, it can also be a problem. So, say if you are selling mobile phones in different states, then it’s possible that you have to sell the same product at a different price depending on the state.

The Goods and Services tax will be the same for every state. Thus, you won’t have to worry about calculating different prices for your products. Plus, GST will also eliminate other indirect taxes such as central sales tax (CST), service tax, etc. Under the GST regime you will only need to pay only one tax for the state you are operating your business in, called SGST (State GST), and one for the central government, called CGST (Central GST).

GST will also allow you to offer your products at lower prices due to the elimination of double taxes. The repeat taxes applied on a product can be claimed by you in the form of Input Tax Credit if you are GST liable.

Preparing for GST

Unless preparation is done in advance, working under the GST regime can become really difficult for you as an SME. Thus, it’s better to get started as soon as possible.

The first thing you must do is ascertain whether you are liable to register for GST or not.

The government has linked the aggregate turnover of a business with the GST liability. So, if your annual turnover is higher than the threshold limit then you have to register for GST.

The aggregate turnover requirement for GST registration is given below:

 

 

Region Aggregate Turnover
Liability to Register Liability for Payment of Tax
North East India Rs 9 Lakhs Rs 10 Lakhs
Rest of India Rs 19 Lakhs Rs 20 Lakhs

 

However, getting your business registered is only the beginning. There are many things you need to make yourself familiar with, such as Input Tax Credit, the filing of returns, and issuing invoices.

Depending on your business you will need to file GST returns on a monthly basis, and also keep a track of your stock and issued invoices to claim input tax credit.

How to Make the Transition Easier?

There is a slew of changes that the GST regime will bring in the current business industry. Dealing with them all can be extremely difficult on your own. Thus, it’s better to hire a good CA or tax consultant.

Another good thing that you can do is subscribe to an invoicing and expense management program that is GST compliant. It will help you create invoices that in line with the GST standards, and keep a track of your inventory and sales.