With India becoming GST ready, there is a dire need for startups (or SMEs) to understand the core concepts of the lawand its practical application in their businesses. Stakeholders of the startup ecosystem believe that GST should not be a matter of concern for entrepreneurs right now and the small businesses should rather focus on their cash flows.

What does GST has in store for startups and SMEs?

GST is deemed to benefit all businesses in India, but small businesses can rejoice for the following reasons:

1. Ease of starting business: Any new business needs to have a VAT registration from sales tax department. A business operating in many States has to face a lot of issues regarding the different procedures and fees in each state. GST will bring about a uniformity in process and centralised registration that will make starting business and expanding in different States much simpler.

2. Higher exemptions to new businesses: As per the current structure, any business with a turnover of more than INR 5 Lakhs (Different for each state) has to get VAT registration and pay VAT. GST will make this limit higher, to upto Rs 20 Lakhs (10 Lakhs in selected State) and, further to it, businesses with turnover between Rs 20 and 75 Lakhs will be taxed at a lower rates. This will bring respite from tax burdens to newly established businesses.

3. Simple taxation: Currently, a startup spends a lot of time and energy to manage the various taxes at various points. Adhering to different regulations at different States make the process very complex. GST will simplify the process by integrating all taxes, making the process of paying tax simpler.

4. Respite for businesses in both sales and services: Businesses like restaurants, which fall under both sales and service taxation, have to calculate the VAT and service tax on both items separately. This makes the calculations process very complex. GST will not distinguish between sales and services, and thus the tax calculation will be done on total.

5.  Reduction in logistics cost and time across States: Many transport vehicles get delayed during movement across States due to small border tax and checkpost issues. Interstate movement will become cheaper and less time consuming, as these taxes will be eliminated. “The whole Indian market opens up for manufacturers as interstate supply becomes tax-neutral,” explained Narayan. This will also bring down costs associated with maintaining high stocks, as there will be undisrupted movement of goods. As per a CRISIL analysis, GST can reduce logistics costs of companies producing non-bulk goods (comprising all goods besides the primary bulk commodities transported by railways – coal, iron ore, cement, steel, food grains, fertilisers) by as much as 20 percent.

6.  Positive Impact on cost side: Unlike VAT and service tax, GST is essentially a tax on value addition at each stage, and levied at point of sale and not purchase. This means that the consumer bears the GST charged by only the last dealer in the supply chain, thus making it cheaper for the consumer and increasing the profitability of his business.

7.  No Cascading Impact of Taxes: There are various other taxes levied by the Central and State government on production, manufacture and distributive trade, where no set-off is available in the form of input tax credit. These taxes accumulate and lead to increasing the cost of final product which the consumer has to bear. GST subsumes all these taxes which are set off at each stage starting from producer and ending at the retailer, thus easing the burden on final consumer.

GST will assist in bringing down fiscal deficit by boosting tax collection and simplifying the tax regime, which is expected to bring about better compliance.