On 1st July, when India woke up to a completely new tax regime, business owners are struggling to figure out the impact and trying harder to generate profit from this as well. More than big businesses, GST will have a major impact on the small medium enterprises, who are not yet established to handle such kind of fluctuation in the market.
For people who are planning to start the small business in the coming years, here is some comprehensive guide on how GST will impact you.
Positive Impact of GST on Small Businesses
1) Ease of doing business: Currently, a business has to be registered with various tax authorities, maintain many documents and file different tax returns to different authorities so that after that there will be no obligations. In the current tax regime, people planning to start a business have to undergo through Value-added tax registration with State’s sales tax department. This registration is mandatory for all the state where the business has to carry out its operations.
2) Reduced logistics cost: A large mass of people must have noticed a long queue of trucks at a state’s border. These transportation trucks have to pay a particular amount of entry taxes or octroi for every time they enter a state. These taxes are collected by individual states and add up to their final account. The big ques of trucks near the toll plazas to pay taxes to pass through the state leads to a lot of time wastage. GST will reduce logistics/ transportation costs and time in a large amount by replacing Central Service Tax and Octroi.
3) Expansion of business: Mostly, small businesses restricts their business operations to one state due to inter-state taxes and complicated tax procedures, which might create a problem for small business owners. This restricts their customer base to the state where they are located. GST will simplify the inter-state tax complications by reducing the cost of supplying goods across the states. This will encourage business owners to expand and grow business Pan India.
4) Reduced tax burden: Right now, businesses with the turnover of less than Rs. 5 lakhs do not have to pay the Value-added tax registration fee. This limit has been increased to Rs. 20 lakhs under the proposed GST bill. This would reduce the tax burden on the small medium enterprises and they can earn more profit by savings.
5) Elimination of the distinction between goods and services: In the current tax regime, Value added tax is applicable to goods and Service Tax and to all kind of services, which comes with it. However, post-GST, a uniform tax will be levied on both goods and services, making invoicing simpler. Businesses will be able to take advantage of the tax incentives in a better way. This will greatly reduce tax evasion and provide better services to the customers.
6) Elimination of tax on tax: This situation is known as Cascading effect. Cascading effect means a situation where tax is imposed on previously charged taxes. The consumer has to bear this additional burden of VAT charged on the excise duty. Good and Service Tax will mitigate the cascading effect of tax as only one tax will be applicable.
Negative Impact of GST on Small Businesses
1) Missing Trader Problem: According to the new concept of Goods and Service Tax, you’ll get tax credit only if the person before you in the supply chain has paid the taxes as well as filed the return. Even if a supplier in the supply chain doesn’t file the GST return then the following supplier in the chain will have to pay 18% tax on the value added by each supplier in the supply chain. This can affect the small industries badly since, at the small level, the profit margin decreases and comes to 5-10%. Moreover, the government will be receiving taxes twice on the entire supply chain. Therefore, in order to prevent this problem, it becomes very important to check the vendor ratings. The new regime will help in maintaining vendor rating.
2) The loss to freelancers: If a person does not have fixed place of business and is a freelancer, then you have to register yourself as a ‘casual taxable person’ under the GST because your income keeps on fluctuating with time to time. In this case, the limit of Rs.20 lakhs does not apply. Even if you do not have a fixed place of business, you still have to register with GST to show that particular amount of earning. This rule might create problems for freelancers.
3) Technological Challenge: There are plenty of startups in the market, who don’t have the expertise to deal with the online systems. So, they might need the help of intermediaries to help them with the registration process. This will be added up into their total cost.
4) Reverse Charge Mechanism: Imagine, if the turnover of your company is less than Rs.20 lakhs, you do not need to get yourself registered with the GST because it’s not reaching to the minimum qualification level. If you are doing business with an unregistered dealer, there is a reverse charge applicable on the buyer i.e. he needs to pay GST on his purchase. Apart from this, he also has to issue an invoice for the purchase made by him from the unregistered seller. It’s mandatory to upload this invoice in the GST system.
5) Harsh mechanism of ‘Input tax credit’: Under the new regime policy, input tax credit can only be availed by the buyer if the supplier has paid the tax inside a given window. This is one of the problems which most of the startups will face in their future when they gradually increase the functioning and grow.
6) The decrease in demand for goods: In the current tax policy, the manufacturers have to pay no excise duty if their gross turnover is less than Rs 1.5 crores. However, the post-GST limit will be decreased and brought down to Rs.20 lakhs. So, the cost of goods and services will increase for the final consumers as the burden of this will be passed on to them. This might, in turn, reduce the demand for those goods and services.
Moreover, after seeing so many pros and cons of the new GST bill, it’s clear that this will be the turning point for market and especially for small and medium scale enterprise. Some factors increase cost for businesses but on the other hand, some reduce it. But, in the long run, the positives will outweigh the negatives and will clear the ocean for a unified national market and with a lot of oversea opportunities.