How Does GST Impact Startups In India?

With a historic announcement made on the 1st of July, 2017, India entered a new financial regime under the motto of “one nation, one tax” with the acceptance of Goods and Service Tax (GST). By passing the Goods and Services Act, 2017, the Government merged all laws pertaining to the taxes to be paid by companies in different states into a single law, act, and tax. This allowed companies operating in every state to follow a single taxation law, ultimately shifting the focus from tax on production to tax on consumption. 

GST was introduced with the intention of improving unity among the Indian citizens by unifying the taxes paid by them. Under the new law, the citizens are required to pay a single tax for any taxable event in GST instead of paying a range of different taxes, including customs duty, excise duty, entry tax, service tax, and more. 

Today, startups and small businesses are the backbones of the Indian economy. With the Government providing incentives to startups and encouraging young entrepreneurs to set up new ventures, it is important to discuss the impact GST has on startups in India.

The Positive Impact Of GST On Startups In India

Here are some important ways in which GST proves useful for startups in India:

Convenience In Starting A New Business

The process of setting up a new business venture is fairly challenging for budding entrepreneurs. Before GST, a good deal of tax compliance was required to set up a startup in the country, making the process slow and tedious. With GST consolidating all the indirect states and central taxes under a single umbrella, starting a new business has become a lot easier

As the complications in tax compliance go down, new entrepreneurs can get the work done with a single registration and lesser paperwork. Instead of spending their time in dealing with tax compliance, GST allows entrepreneurs to focus on their core business processes. 

Lower Logistical Costs

Especially if a startup involves frequent inter-state delivery of goods, the introduction of GST has made logistics a lot cheaper for businesses. Companies like CartonCloud and XpressBees help automate transport and logistics. This is because it reduces the bulky tax procedures involved in the delivery of goods across the country. Before GST, trucks crossing state borders were required to pay octroi tax which differed from one state to another. This often led to higher transportation costs incurred by businesses. As GST dissolves all other taxes and unifies taxation across all states, it reduces the logistical costs incurred by new and growing businesses. 

Freedom From Double Taxation

Before GST, taxes were imposed on goods that were already taxed as they passed through different phases before reaching the end-users. This led to double taxation, leading to the end consumers paying more than what they ideally should. 

GST is applied on goods only when they are ready for consumption, without any value addition taking place at different stages. This frees the consumers from paying more and businesses from charging more for the goods sold. As startups are often conscious about finding the sweet spot while pricing their offerings, GST prevents them from charging more than what is required. 

Simpler Invoicing

Especially when it comes to financial management, new businesses often lack adequate resources for handling complicated business processes. The advent of GST has certainly made invoicing easier for startups by getting rid of the separate taxes charged on products and services. This has also led to a much-needed reduction in tax evasion, allowing businesses to avail themselves of multiple tax benefits. 

Scope For Expansion

Before GST, new and growing businesses often hesitated before expanding their ventures due to high inter-state taxes and complicated tax procedures. GST has simplified taxation for startups and provided them with a conducive environment to diversify their ventures across the country. 

The Negative Impact Of GST On Startups

While GST is beneficial for new businesses to a great extent, it has its own share of drawbacks.

Burden On The Manufacturing Sector

Before GST, organizations operating in the manufacturing sector were required to pay excise duties only if their turnover amounted to INR 1.5 crores or more. GST has reduced this benchmark to INR 20 lacs, adding the burden of taxation on manufacturing startups.

Effect Of The Reverse Charge Mechanism

If you run a startup that does not cross the benchmark set by the government for being taxed, you can be exempted from paying taxes. However, if you are a small startup that supplies goods to an organization that is registered under GST, you would be required to pay GST via self-invoicing. This would result in you having to pay taxes even if your startup is not registered under GST.

The Need To Be Tech-savvy

Today, almost all GST registrations and filings have become online to facilitate faster and more organized processes. However, this may become a challenge for startups that are not used to digitization. It is, therefore, always important for aspiring entrepreneurs to be well-versed with the latest technological advancements and drive digitization within their organizations. 

Capital Blockage

Under the new tax regime of GST, organizations are required to uphold a chunk of their funds electronically with the tax department. This leads to a substantial portion of a startup’s working capital getting blocked. Moreover, the portion of capital set aside by startups for GST does not give any interest to the companies.

A Loss To Freelance Businesses

If you have set up a freelance business without a fixed and registered office, you cannot register your venture under GST. Here, the capital requirement of INR 20 lacs is not applicable unless you have a fixed place dedicated to your business. Until then, you would be regarded as a casual taxable citizen under GST.

The Final Word

This was a brief overview of the impact of GST on startups in India. If you are looking forward to setting up a new business venture, it is advisable to be well-versed with the latest tax regime and all the provisions under GST before starting your business.