Decoding GST for Startups - Episode 1

Author: Ruchi Jha

Goods and Service Tax (GST) is surrounded with a lot of enigma since its launch. The new tax regime is going through a teething phase which is expected to settle down in some time. Let us see what GST looks like from the perspective of startups.

What is Goods & Service Tax (‘GST’)?

GST, the biggest Indian tax reform since independence, is a common tax on supply of goods and/or services. Unlike earlier tax regime wherein separate legislations were prevalent for taxing goods and services, GST provides one legislation for taxation of goods and services. It is worth mentioning that more than 40 taxes levied by the Central Government, State Governments and local bodies have been subsumed under GST. Following are the major taxes which have been subsumed under GST:

  • Central Excise Duty
  • Central Sales Tax
  • Service Tax
  • Value Added Tax (VAT)
  • Entry Tax
  • Entertainment Tax

GST is a tax collected on value addition made on goods and services at each stage of sale or purchase (supply) in the supply chain. While majority of earlier taxes were origin based, GST is destination based consumption tax i.e. tax revenue will be available to the destination state where the goods/services are consumed.

With the introduction of GST, Government has emphasised on ease of doing business by keeping uniformity in taxes and reduction in tax cost with focus on eliminating tax cascading.

 Impact of GST on Startups

Start-ups have been grappling with a sea of changes in taxation structure due to introduction of GST. Some of the quintessential impacts are as mentioned below:

  • Under the erstwhile tax regime, the taxpayer was required to register under different tax laws, pay different taxes, and file plethora of returns, while, under GST all such taxes have been replaced by one single tax which has resulted in ease of doing business.
  • GST has helped in removing tax cascading and resulted in reduced cost. Under erstwhile tax regime taxes charged under one legislation were not allowed as input tax credit under different legislation, which resulted in increased cost of the product and double taxation, especially for the start-ups. However, under GST, tax paid on input/input services/capital goods is allowed as credit for payment of tax on output supplies. For the ease of understanding, the impact of GST on cost to the company is tabulated below:
  • Add to the above, the turnover limit for obtaining registration under GST is INR 20 Lakhs (INR 10 Lakhs for north east states), with a few exceptions where the turnover limit of 20 lakhs is not applicable. It is worth mentioning that under erstwhile service tax regime, the assesse was required to register after crossing the turnover of INR 9 lakhs.
  • Government has introduced a scheme called composition levy, which can be opted for by specified suppliers having turnover less than INR 1 crore, to pay 1-5% of tax on supply of goods/services. Under composition scheme, the taxpayer has been given relaxations in relation to filing of return, issue of invoices, payment of taxes etc.
  • Recently, Government came up with compliance relaxation for small taxpayers having turnover less than INR 1.5 crores. While normal suppliers are required to file monthly return, a small supplier will be required to file quarterly return. A big relief for start-ups.
  • In the initial phase of business, while investment are more, revenues are not at par with the investment. The start-ups may not be able to utilise the input tax credit due to lesser output tax and this may have an impact on cash flow and working capital of start-up.

How to be GST Compliant?

Compliance is critical under GST and therefore, Government came up with GST compliance rating which will be given to the assesse basis various parameters like timely payment, return and reconciliation etc. There are industries which would like to see your compliance rating before making any decision on transaction with you. Therefore, it becomes important to be GST compliant not only to avoid any penalty/prosecution under GST Act but also to get more business.

To be GST compliant, once the GST registration number is obtained, the supplier will be required to issue a GST compliant tax invoice for supply of goods/services. A normal supplier needs to file below mentioned returns:

Before filing GSTR-3/GSTR-3B (Summary return to be filed for any period if specifically prescribed by government), the tax liability for the month shall be discharged.

There has been multifold increase in compliance burden for a small business and a normal taxpayer needs to file 37 returns per annum. However, as indicated in last GST council meeting some relaxation in compliance is on the cards.

We will explore composition levy in the next article followed by a guide on filing returns. For a detailed reading on GST, you may refer the following books:

  1. GST Made Easy-Answer to All Your Queries on GST by CA Arpit Haldia

  2. GST made Simple - A Complete Guide to Goods and Service Tax in India by Dr. Awdhesh Singh