What is GST?
The biggest indirect tax reform since 1947, GST bill is expected to bring about an economic integration of the Indian economy. GST is gonna make the process of indirect taxation, easier and effective. The tax payers will pay one consolidated tax instead of the bundles of taxes including State Value-Added Tax (VAT), Central Excise, Service Tax, Entry Tax or Octroi and other indirect taxes.
“The challenges faced due to a complicated tax system on business transactions has been debated for a long time”. This tax will be levied on manufacture, sale and consumption of goods as well as services at the Central and State government levels. “The distinction between Goods and Services will be reduced gradually, thereby making tax compliances easier,”. Most of the developed countries use this form of taxation for ease and convenience and to avoid double taxation.
GST would be payable on price actually paid or payable, termed as “transaction value”, which will include packing cost, commission, and all other expenses incurred for sales. This tax will be payable at the final point of the consumption. The GST will have two components – the Central GST and the State GST, thus, empowering both the State and Central government to legislate and administer their respective taxes.
Except the Tamil Nadu government, which believes that this bill will take away the autonomy of the State government, all other States are in support of the bill.
What would be the impact of GST on Startups?
GST is believed to benefit all businesses in India, but small businesses can rejoice for the following reasons:
1. Ease of doing 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 Rs five lakh has to get VAT registration and pay VAT. GST will make this limit higher, to upto Rs 10 lakh and, further to it, businesses with turnover between Rs 10 and 50 lakh will be taxed at a lower rates. This will bring respite from tax burdens to newly established businesses.
3. Easy 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,”. 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.
How does GST reduce the cost of doing business? 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.
Secondly, 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.
To conclude, we can say that somehow it is a win-win situation for the Government as well as the consumer. Entrepreneurs, directly or indirectly will be benefitted by GST.
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