Impact of GST on Startups and Small Businesses in India

GST was implemented in India in July 2017. The GST was meant to replace a slew of indirect taxes with a federated tax. It has impacted almost all Industries, including start-ups. Startups are liable to pay taxes as they cross the threshold limit are liable to pay GST from the moment they cross the threshold limit (Rs 20 lakh or Rs 10 lakh as the case may be).

India is the third-largest startup ecosystem with over 27,916 startups, as of February 1, 2020. Startups play a vital role in the development of the country. The success ratio of new startups is hardly 1%, with GST startups may find it easy to comply with taxes and focus on building and managing their startups. In this article we will focus on Impact of GST on Startups and Small businesses in India.

Impact of GST on Startups and Small Businesses

Positive impact

1. Reduced logistics cost

GST has reduced the transportation cost levied during the interstate transport of goods. CST and octroi are the two taxes that were levied during the interstate transportation of goods. these taxes are collected by individual states. After the introduction of GST, It has replaced CST and octroi which has reduced the transportation and logistics costs. Many states avoid supplying goods to other states due to octroi. The reduction of delivery time and logistics cost had a great impact on startups.

2. Reduced Tax Burden

Earlier businesses with a turnover of less than Rs. 5 lakhs do not have to pay the VAT registration fee. The limit has been increased to 20 lakhs which gave a huge relief to Small businesses and startups.

3. Cascading Effect

The cascading effect is the effect on which 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%. in this case the consumer has to pay additional VAT on the product. GST has mitigated this cascading effect as only one tax is applicable.

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4. Ease of Managing Business

Before GST, businesses have has to get registered with various tax authorities and maintain many documents. they also needed to file different tax returns to different authorities. Post GST, there is single registration and very less paper work required. due to this businesses now can focus on productive businesses operations rather than taxes.

5. Expansion of Business

Most businesses restricted their business operations to one state due to interstate taxes and complicated tax procedures. Post GST inter-state tax complications and transport/shipping cost has reduced.

Want to register for GST online. Follow our step by step guide to register for GST easily.

Negative Impact of GST

There are also some difficulties and problems which have affected the startup ecosystem.

1. Decline to freelancers

If you do not have a fixed place of business or you are a freelancer you have to register yourself as a casual taxable person under the GST. The 20 lakhs limit is not applicable in this case. even if you don't have a fixed place of business you have to register yourself under GST.

2. Tax overburden on Startups

Under GST it has become mandatory to upload invoices and make an e-way bill on a real-time basis. Startups have to focus on tax compliance regularly which affects their innovation capabilities.

3. Small Startups under Tax net

Earlier manufacturing units having a turnover of fewer than 1.5 crores do not have to pay or get registration. Post GST the threshold has been bough down to as low as 20 lakhs. This has bought many small startups under the tax net.

4. Reverse charge mechanism

If the goods delivered by a small business who is exempted from GST, supplied goods to a firm registered under GST. In this case the buyer has to pay the GST by self invoicing.

5. Technology challenges

As all the GST compliance as all filings and registrations have become online, some small businesses and startups might face some problems.

GST has its challenges and has impacted the startups and small businesses in both positive and negative ways. It's clear that the positive impact of GST outweighs the negatives that have paved the way for the national market.