INTRODUCTION
Significant changes were made to India’s taxation system on July 1, 2017, with the introduction of Goods and Services Tax (GST). It consolidated numerous indirect taxes formerly imposed by both the central and state governments.
In our country, which is still growing and has lots of small businesses and startups, the many taxes and rules have made it hard for us to become a developed nation. Previously, small manufacturing companies grappled with paying Excise, VAT, and Service Tax, amounting to a hefty 25% tax rate. However, with the implementation of GST, this burden has been significantly reduced to 18%, providing much-needed relief to these companies
While GST has brought positive changes such as simplified tax compliance and expanded market opportunities for startups, it has also posed challenges like compliance burdens and cash flow issues. Even though startups faced difficulties, they changed and learned how to deal with the new tax rules. This helped them do well in a changing business world.
BACKGROUND ON GST
The Kelkar Task Force was the first to propose the idea of nationwide goods and services (GST) in India for Indirect taxes in 2000. The aim was to substitute the convoluted and chaotic tax system with a streamlined one. The updated system aims to simplify compliance, reduce unnecessary taxes, and promote economic unity. After many talks and preparations, GST became a law in 2017. Overall, GST aims to make taxes fairer and clearer for everyone.[1]
India has three types of GST: CGST, SGST, and IGST. These divisions make it simple to distinguish between goods moving within a state and those moving between states.
- SGST: SGST is the tax imposed by the state government on goods and services traded within the state. It covers various taxes like entertainment, luxury, and purchase taxes. In union territories like Lakshadweep, SGST is replaced by UTGST, which serves a similar purpose.
- CGST: Intra-state transactions of goods and services are subject to GST imposed by the central government. Money is collected by the central government through CGST. It applies CGST together with SGST or UGST, and then the money earned is shared between the state and central governments.
- IGST: The tax known as Integrated Goods and Services Tax (IGST) is levied on the trade of goods and services between various states, as well as on imports and exports, with both the central and state governments sharing the collected taxes. Additionally, IGST allows businesses to claim an input tax credit, which prevents double taxation and helps them save money at each stage of the supply chain.
OVERVIEW OF STARTUPS
Startups are emerging ventures with innovative concepts, striving to revolutionize industries with limited resources. Known for their agility and creativity, they operate in dynamic sectors like technology, e-commerce, and biotech. Vital for job creation and economic growth, startups often rely on funding from investors, accelerators, and incubators to fuel their expansion and contribute to societal progress.
The benefits of startups encompass job creation, global competitiveness, fostering an entrepreneurial ecosystem, social impact, technological advancement, economic growth, innovation, and disruption.[2]
IMPACT OF GST ON STARTUPS:
POSITIVE IMPACT:
Simplifying the Tax Process for Startups
Taxation used to be complicated with various taxes in different states, causing burdens. Now, with all indirect taxes merged into one, tax calculations are simpler with less paperwork. Startups in the software industry benefit greatly from a single tax rate, as previously VAT and service tax were applied separately to software products or services.[3]
Common registration
Previously, startups had to register repeatedly for various taxes or across different states. Now, they only need to register once on the GST network, enabling them to operate seamlessly across India. This facilitates a unified market for startups and opens avenues for business expansion.[4]
Reduced Tax Burdens and Increased Registration Thresholds
Under the old tax system, startups with earnings over INR 5 lakhs had to sign up for Value Added Tax (VAT) and pay it, but this varied by state. With GST, this threshold is now INR 40 lakhs, meaning small businesses and startups don’t have to register. They can also choose to pay lower taxes if their turnover is between INR 20-50 lakhs, but it’s not mandatory. These tax breaks aim to help startups.[5]
Cost efficiency
Startups in the service industry can offset VAT paid on purchases against service tax under GST, reducing expenses and improving cash flow. This option provides financial relief and flexibility, allowing startups to allocate resources more effectively and invest in growth opportunities.[6]
Encouraging SMBs to Expand Across India
The one-nation-one-tax has leveled the playing field in India. SMBs formerly avoided interstate sales due to tax and other complications. GST removes this concern, and the ability to transfer tax credit regardless of buyer and seller location will motivate entrepreneurs to explore sales beyond their state.[7]
Improving Supply Chain Efficiency
With GST, the movement of goods would become smoother, benefiting the logistics industry nationwide. This will enhance the efficiency of startups’ supply chains, making their business operations more effective and streamlined.[8]
Reduced logistics cost
A CRISIL report suggests that GST could provide a much-needed boost to e-commerce platforms by reducing shipping costs by 20%, thereby making it more affordable for e-commerce startups. Consequently, this would lead to increased business for shipping companies.[9]
NEGATIVE IMPACT:
- Missing Trader Problem:
In GST, you can only claim tax credit if the previous supplier paid taxes and filed returns. If they don’t, the subsequent supplier is obligated to remit an 18% tax on the augmented value. This hurts small businesses with low-profit margins. If they have to pay the full 18%, they might end up losing money.
Moreover, taxes may potentially be received twice by the government throughout the entire supply chain. To mitigate this concern, it is imperative to assess vendor ratings diligently. These ratings will be operated by the GSTN. In a situation where a vendor defaults on tax payments or return filings, their ratings will decrease. Hence, before engaging in any vendor deal, it is necessary to verify their ratings on GSTN.[10]
- Obstacles in technology
Many startups lack the necessary expertise to manage online systems. The proposed GST guidelines require e-commerce startups to submit both quarterly and monthly returns on the GST network. Moreover, they are required to gather taxes from sales made through their online platform. This will lead to increased paperwork and administrative expenses for these startups.[11]
- Reverse Charge Mechanism
The reverse charge mechanism if a small business, not liable for GST, sells to a GST-registered firm, the buyer needs to create an invoice for themselves and send it to GSTN when filing returns. This cost is essentially like bad debt for the buyer.[12]
- There is no single taxation rate.
India has adopted a dual GST model, comprising Central GST (C-GST) and State GST (S-GST) for intra-state transactions, and Integrated GST (I-GST) for inter-state transactions. Some critics say these are merely rebranded versions of previous taxes, such as excise, service tax, VAT, and CST.[13]
- Rising Tax Rates: A Challenge for Service-Oriented Startups
Previously, startups solely providing services were subject to a service tax rate of 15%. However, with the anticipated introduction of GST at a rate of 18%, there will be a 3% increase in the tax rate for these startups. In the service sector, this presents a notable challenge for Indian startups, as the majority operate within it. With the implementation of GST, they will need to raise prices to offset this tax increase, as they cannot afford to incur further losses.[14]
- Decline in demand for goods
Under the current tax system, manufacturers enjoy excise duty exemption if their gross turnover is below Rs 1.5 crores. However, under GST, this threshold will reduce to Rs. 20 lakhs. Consequently, consumers will face increased costs for goods and services as this burden is passed on to them. This may potentially dampen the demand for these goods and services.[15]
CONCLUSION
The introduction of GST in India has brought about both positive and negative impacts on startups and small businesses. On the positive side, GST has simplified the tax process, reduced tax burdens, and increased registration thresholds, providing relief and flexibility for startups. It has also encouraged SMBs to expand across India by leveling the playing field and improving supply chain efficiency. Additionally, GST has promoted transparency and reduced compliance costs, benefiting startups in various sectors
GST has presented challenges for startups, including the missing trader problem and technological hurdles, impacting cash flow and adding administrative burdens. The reverse charge mechanism and dual GST model add complexity, while increased tax rates for service startups and decreased demand for goods create financial strains.
Despite the difficulties, startups have shown they can adapt to the new tax system. It’s important for leaders to help them with these challenges and make rules that help businesses grow. With the right rules, GST can help businesses become more creative and successful, helping India become a better country.
Author(s) Name: Ankush Dhoti (Savitribai Phule University, Pune (DES’s Shri Navalmal Firodia Law College Pune))
Reference(s):
[1]‘Brief History of GST’ (gstcouncil.gov.in) <https://gstcouncil.gov.in/brief-history-gst> accessed 26 April 2024
[2] CA Rishabh Maheshwari, ‘Impact of GST on startups in India’(CA Goyal Mangal and co.)<https://www.cagmc.com/impact-of-gst-on-startups-in-india/> accessed 10 April 2024
[3] Kashif Ansari & Garima Jain, ‘Impact of GST on Indian Startups’ (2017) 3(5) INTERNATIONAL EDUCATION AND RESEARCH JOURNAL <http://ierj.in/journal/index.php/ierj/issue/view/23>accessed 26 April 2024
[4]Ibid
[5] Ashish M. Shaji, ‘Impact of GST on Startup’(ENTERSLICE,16 October2020) <https://enterslice.com/learning/impact-of-gst-on-startups/>accessed 26 April 2024
[6]Ibid
[7] CA Rishabh Maheshwari, ‘Impact of GST on startups in India’(CA Goyal Mangal and co.)<https://www.cagmc.com/impact-of-gst-on-startups-in-india/> accessed 10 April 2024
[8] Ibid
[9]Kashif Ansari & Garima Jain, ‘Impact of GST on Indian Startups’ (2017) 3(5) INTERNATIONAL EDUCATION AND RESEARCH JOURNAL <http://ierj.in/journal/index.php/ierj/issue/view/23> accessed 26 April 2024
[10] Shreya Bhardwaj, ‘12 ways in which GST will impact your startup’ (myoperator.com) <https://myoperator.com/blog/12-ways-in-which-gst-will-impact-your-startup>accessed 26 April 2024
[11]Ibid
[12]Shreya Bhardwaj, ‘12 ways in which GST will impact your startup’ (myoperator.com) <https://myoperator.com/blog/12-ways-in-which-gst-will-impact-your-startup> accessed 26 April 2024
[13]Kashif Ansari & Garima Jain, ‘Impact of GST on Indian Startups’ (2017) 3(5) INTERNATIONAL EDUCATION AND RESEARCH JOURNAL <http://ierj.in/journal/index.php/ierj/issue/view/23> accessed 26 April 2024
[14]Ibid
[15]Shreya Bhardwaj, ‘12 ways in which GST will impact your startup’ (myoperator.com) <https://myoperator.com/blog/12-ways-in-which-gst-will-impact-your-startup> accessed 26 April 2024
