Goods and Services Tax aka GST is scheduled to be in effect from 1st July and will change the way we pay our taxes for sure. The system is a game changer in the Indian taxation system and the biggest tax reform taken in 70 years of Indian history.
Asia’s third-largest economy, after China and Japan, will witness a single taxation system for goods and services after waiting for as long as 10 years. GST rollout will dismantle inter-state barriers to trade in goods and services.
But how will this new tax system impact startups and small business? Will the startup ecosystem reap benefits out of Goods and Services Tax (GST)? Or will it adversely cause harm to the startups and small businesses?
This guide will drive you through the complete system of GST including how will it work, the impact on startups and SMEs and more.
So let’s begin!
What is GST?
Goods & Services Tax is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition. That simply means that business will have to pay taxes on value addition and not on the final value of goods and services.
To understand GST in details let us first discuss various definitions and concepts under this. Let us start with multi-stage.
When an item is available right next to your neighborhood store or a supermarket for sale, it travels through a chain of stages before arriving at the retailers. The first stage is buying the raw materials followed by production or manufacturing.
If we had a pictorial representation of the various stages, it will look something like this. However, this is the elementary representation. There may be some other stages involved depending on the type of goods and services.
The items are then warehoused by the distributor or wholesaler. The retailer then buys the products from the wholesaler and finally sells it to the end consumer like us. The whole process completes the life cycle of a product – from raw materials to end consumer.
The Goods and Services Tax shall be levied on each of these stages. This makes GST a multi-stage taxation system. However, the taxes will be levied on value addition.
Let us discuss value addition before diving into how the taxes will be levied and what are the different categories and value of taxes for different goods and services.
Let us assume that a manufacturer purchases cotton worth ₹1000 to make shirts. Cotton here is the raw material. After manufacturing the shirt, the manufacturer adds a value of ₹1000. So the final value of the shirt is ₹2000.
The manufacturer then sells the shirt to a wholesaler or warehouse who then adds packaging & labels to the shirt and is responsible for the transportation and distribution of the shirt to various retailers.
The wholesaler adds some value say ₹1000 to the shirt (profit) making the final value of the shirt to ₹3000.
The retailer buys the shirt from the wholesaler at ₹3000 and then adds a value of ₹1000 (his profit) and finally sells the shirt to the end consumer at ₹4000.
GST will be applicable on all these value additions. If the rate of Goods and Services tax is 10 percent (for example) for all of them, the manufacturer will have to pay ₹100 (10 percent of his value addition of ₹1000), the wholesaler too will have to pay a tax of ₹100 (10 percent of his value addition of ₹1000) and retailer will pay ₹100 in this case.
Now let us talk about one more term – destination-based.
Since GST is a destination-based tax, the center would not levy an excise duty and states would not levy VAT as it was during earlier taxation system. Then there was VAT at the point of sale.
GST will replace all these taxes with a single destination-based tax.
Assume that the shirt was manufactured and warehoused at Chennai and sold in Mumbai. Chennai being in Tamil Nadu will collect GST for manufacturing and warehousing, but lose revenue when the shirt moves out for sale in Mumbai. Maharashtra will collect GST for value addition by the retailer as the product is being sold in Maharashtra.
How Does GST Work?
India is the largest democracy in the world with 1.311 billion people living in the territory. Implementing a completely new tax regime in such a large economy is not easy.
The GST Council has devised a foolproof method of implementing this new tax regime by dividing it into three categories: CGST, SGST, and IGST.
CGST: where the revenue will be collected by the central government
SGST: where the revenue will be collected by the state governments for intra-state sales
IGST: where the revenue will be collected by the central government for inter-state sales
GST is a consumption based tax i.e the state where the goods or services are to be consumed will collect taxes and not the state where the goods are manufactured. We have already explained this above.
IGST is designed to ensure seamless flow of input tax credit from one state to another. One state has to deal only with the Centre government to settle the tax amounts and not with every other state, thus making the process easier.
For example – A dealer in Punjab sold goods to the consumer in Punjab worth Rs. 1,00,000. The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%, in such case the dealer collects Rs. 18000 and Rs. 9000 will go to the central government and Rs. 9000 will go to the Punjab government.
Now, if the dealer in Punjab had sold goods to a dealer in Uttar Pradesh worth Rs. 1,00,000. The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%. In such case, the dealer has to charge Rs. 18,000 as IGST. This IGST will go to the Centre.
But how will the tax be adjusted between different states (interstate transactions)?
Suppose goods worth Rs. 1,00,000 are sold by manufacturer A in Punjab to Dealer B in Punjab. B resells them to a trader C in Gujarat for Rs. 1,75,000. Trader C finally sells to End User D in Gujarat for Rs. 3,00,000.
Suppose CGST= 9%, SGST=9%. Therefore, IGST=9+9=18%
Since A is selling this to B in Punjab itself, it is an intra-state sale and both CGST @9% and SGST@9% will apply.
B (Punjab) is selling to C (Gujarat). Since it is an interstate sale, IGST@18% will apply.
C (Gujarat) is selling to D also in Gujarat. Once again it is an intra-state sale and both CGST @9% and SGST@9% will apply.
However, GST is a credit based taxation system. The table below will help you understand the exact process of how GST will be levied.
|1||A to B||1,00,000||1,00,000*9% = 9,000||———-||1,00,000*9% = 9,000|
|2||B to C||1,75,000||———-||———-||1,75,000*IGST@18% = 31,500
(-) CGST Credit = 9,000
(-) SGST Credit = 9,000
Net = 13,500
|3||C to D||3,00,000||———-||3,00,000*SGST@9% = 27,000
(-) IGST Credit balance = 4,500
Net = 22,500
|3,00,000*CGST@9% = 27,000
(-) IGST Credit = 27,000
Net = 0
Going to Centre
Coming from Centre
The taxpayer’s work is done till step 3. However, GST is a consumption based tax, i.e., the state where the goods were consumed will collect GST. By that logic, Punjab should not get any taxes. Gujarat and Central both should have got (3,00,000*9%) = 27,000 each instead of only 22,500.
Punjab (exporting state) will transfer to the Centre the credit of SGST of Rs. 9000 used in payment of IGST.
The Centre will transfer to Gujarat (importing state) Rs. 4500 IGST credit used.
How Will GST Impact Startups?
Analysts are of the opinion that if GST is implemented correctly, India will gain a higher position in the ease of doing business index maintained by the World Bank and will boost foreign investments in India and into the startup ecosystem.
“In the short-term, it may increase compliance as sellers would have to file a return thrice in a month, compared to once in six months, at present,” said Navin K Rungta, co-founder of eLagaan to MoneyControl. “Sellers would have to report their monthly sales by the 10th of each month, purchases by the 15th and a consolidated statement by the 25th of each month,” said Rungta.
Startups and small businesses are surely going to benefit from GST. However, there might be some negative impacts too.
Let us first talk about the general benefits of GST for startups.
1. Higher Threshold for Registration
Under the current taxation system of the Government of India, any business with a turnover of more than Rs 5 lakh has to get VAT registration and pay VAT (different in different states).
While any business dealing in goods wit a turnover exceeding Rs 10 Lakhs is required to get registered with state tax authorities and obtain a tax identification number (TIN). Similarly, a service provider is required to obtain a registration as soon as his turnover exceeds INR 9 Lakhs.
After GST will rollout, the updated threshold will be Rs 20 lakhs thus exempting many small businesses as well as startups from paying taxes.
Startups and small businesses at the nascent stage or early stage can easily run their day to day operations without thinking about VAT and other state duties and taxes.
2. Transparency and Easy Filing
The entire process of GST is online. From registration to filing returns, each and every single process under the Goods and Services Tax will be online. Startups do not have to run around to tax offices to get various registrations under Excise, VAT, Service tax.
Early stage startups and small business lack resources to hire experts to look after tax calculations and compliance. However, under the GST law, all the compliance has been streamlined and made simple for the benefit of taxpayers.
Thus, an entrepreneur can adhere to the compliances by himself under a “DIY” model. Also, startups dealing with both goods and services will find it much easier to file and pay one GST tax instead of both VAT and service tax.
3. High Liquidity and Faster Process
Bootstrapped startups face a major challenge under current tax regime, the problem of liquidity. Bootstrapped startups do not receive funding in the initial phase. In such cases, many times their working capital gets stuck with tax authorities as a refund claim.
Under GST law, each and every refund claim will be processed online. This will boost the liquidity of small businesses and early stage startups as timely refunds can be expected.
Startups can also expect benefits in upcoming days as GST may be supporting other initiatives of GOI including Startup India, Digital India as well as Make In India. Startups may have more opportunities to exploit and they can also accommodate the change in business model required under GST, being more flexible in carrying out their operations.
While these are the general benefits of GST for startups and small business, some industries are going to avail tremendous advantages from this new tax regime.
The logistic sector is one of them. Let us discuss how?
GST removes the complex taxation system levied by the state and the central governments. Thus, GST will promote the flow of goods from one state to another without any check-post or entry taxes.
According to research done by TCIL, a truck in India typically covers between 250-400 km a day, compared to 700-800 km in the US and Europe.
The reason why India lacks behind the US and Europe is the hefty taxation system. The trucks have to stop at the state borders at check-posts to pay entry-taxes. However, as soon as the GST will come into the light, India will become a single market.
Indirect benefit to e-Commerce startups
Logistics is the heart of any e-Commerce businesses. Quick delivery of goods will increase customer satisfaction and attract more customers. Reduction in unnecessary logistics costs will increase profits for startups involved in the supply of goods through transportation.
Perishable items like fruits and vegetables will reach the destination faster thus reducing the damages. Earlier, a good quantity of perishable items spoils due to delay in transportation. This will increase the benefits for all the similar businesses and people connected to similar businesses.
Tax Burden on Manufacturing Startups
Startups in the manufacturing sector will bear huge burdens. Under current tax regime, only manufacturing business with a turnover more than Rs 1.50 crore has to pay excise.
However, after the implementation of GST, the turnover limit will be reduced to Rs 20 lakh thus increasing the tax burden for many manufacturing startups. This somehow can affect small scale manufacturers.
How to Register for GST?
Registration for GST is as easy as creating a Facebook account. The whole process is online and you can easily register for GST by following the process described in the infographic.
What Documents Are Required for GST Registration?
GST registration is applicable for you if your business is registered for under Central Excise, Service Tax, Sales Tax or VAT.
The documents that are required to register for GST are:
- Constitution of taxpayer
- Proofs of place of business
- Bank account details
- Authorization form
You can watch this video for full registration process:
Knowing Your GSTIN
Under the current tax regime, any dealer registered under the state VAT law is provided with a unique TIN number. The same is issued by respective state tax authorities. Similarly, a service provider is assigned a service tax registration number by the Central Board of Excise and Custom (CBEC).
Under GST, all the dealers will be provided with a unique GSTIN (Goods & Services Tax Identification Number). The government has set up GSTN–a special purpose vehicle to provide the IT infrastructure necessary to support GST digitally. It is expected that 8 million taxpayers will be migrated from various platforms into GST.
Breaking GSTIN – Format of GSTIN
Each taxpayer will be allotted a state-wise PAN-based 15-digit Goods and Services Taxpayer Identification Number (GSTIN).
A format of proposed GSTIN has been shown in the image below.
- The first two digits of this number will represent the state code as per Indian Census 2011
- The next ten digits will be the PAN number of the taxpayer
- The thirteenth digit will be assigned based on the number of registration within a state
- The fourteenth digit will be Z by default
- The last digit will be for check code
How Will GST Benefit a Common Man?
To understand the benefits of GST for a common man, we have to discuss input tax credit. It is the credit an individual receives for the tax paid on the inputs used in manufacturing the product.
If an individual has to pay 10 percent tax, he can subtract the amount he has paid at the time of purchase and submits the balance amount to the government as tax.
Let us discuss it in details with a hypothetical example.
Say a shirt manufacturer pays Rs. 1000 to buy raw materials. If the rate of taxes is set at 10%, and there is no profit or loss involved, then he has to pay Rs. 100 as the tax. So, the final cost of the shirt now becomes Rs (1000+100=) 1100.
At the next stage, the wholesaler buys the shirt from the manufacturer at Rs. 1100 and adds labels to it. When he is adding labels, he is adding value. Therefore, his cost increases by say Rs. 400. On top of this, he has to pay a 10% tax, and the final cost, therefore, becomes Rs. (1100+400=) 1500 + 10% tax = Rs. 1650.
Now, the retailer pays Rs. 1650 to buy the shirt from the wholesaler because the tax liability had passed on to him. He has to package the shirt, and when he does that, he is adding value again. This time, let’s say his value add is Rs. 300. Now when he sells the shirt, he adds this value (plus the VAT he has to pay the government) to the final cost. So, the cost of the shirt becomes Rs. 2145 Let us see a breakup for this:
Cost = Rs. 1650 + Value add = Rs. 300 + 10% tax = Rs. 1950 + Rs. 195 = Rs. 2145
So, the customer pays Rs. 2145 for a shirt the cost price of which was basically only Rs. 1700 (Rs 1100 + Rs. 400 + Rs. 300). Along the way, the tax liability was passed on at every stage of the transaction and the final liability comes to rest with the customer. This is called the Cascading Effect of Taxes where a tax is paid on tax and the value of the item keeps increasing every time this happens.
In the case of Goods and Services Tax, there is a way to claim credit for tax paid in acquiring input. What happens in this case is, the individual who has paid a tax already can claim credit for this tax when he submits his taxes.
In our example, when the wholesaler buys from the manufacturer, he pays a 10% tax on his cost price because the liability has been passed on to him. Then he adds a value of Rs. 400 on his cost price of Rs. 1000 and this brings up his cost to Rs. 1400. Now he has to pay 10% of this price to the government as tax.
But he has already paid one tax to the manufacturer. So, this time what he does is, instead of paying Rs (10% of 1400=) 140 to the government as tax, he subtracts the amount he has paid already. So, he deducts the Rs. 100 he paid on his purchase from his new liability of Rs. 140, and pays only Rs. 40 to the government. So, the Rs. 100 becomes his input credit.
When he pays Rs. 40 to the government, he can pass on its liability to the retailer. So, the retailer pays Rs. (1400+140=) 1540 to him to buy the shirt. At the next stage, the retailer adds the value of Rs. 300 to his cost price and has to pay a 10% tax on it to the government. When he adds value, his price becomes Rs. 1700. Now, if he had to pay 10% tax on it, he would pass on the liability to the customer.
But he already has input credit because he has paid Rs.140 to the wholesaler as the latter’s tax. So, now he reduces Rs. 140 from his tax liability of Rs. (10% of 1700=) 170 and has to pay only Rs. 30 to the government. And therefore, he can now sell the shirt for Rs. (1400+300+170) 1870 to the customer.
So essentially, Goods & Services Tax is going to have a two-pronged benefit. One, it will reduce the cascading effect of taxes, and second, by allowing input tax credit, it will reduce the burden of taxes and, hopefully, prices.
GST Invoicing Format
To issue and receive a GST compliant invoice is a prerequisite to claiming ITC. If a taxpayer does not issue such invoice his customer loses ITC claim and the taxpayer loses its customers. Here we mention the mandatory fields in an invoice:
- Invoice number and date
- Customer name
- Shipping and billing address
- Customer and taxpayer’s GSTIN
- Place of supply
- HSN code
- Taxable value and discounts
- Rate and amount of taxes i.e. CGST/ SGST/ IGST
- Item details i.e. description, unit price, quantity
All different types of GST compliant invoices such as:
- sales invoices
- purchase invoices
- bill of supply
- credit notes
- debit notes
- advance receipts
- refund vouchers
- delivery challans (for supply on approval, the supply of liquid gas, job work and other).
How to File Returns Under GST?
In the table below, we have provided details of all the returns which are required to be filed under the GST Law.
By When?Within three months of the date of cancellation or date of cancellation order, whichever is later.
|Return Form||What to file?||By Whom?|
|GSTR-1||Details of outward supplies of taxable goods and/or services effected||Registered Taxable Supplier||10th of the next month|
|GSTR-2||Details of inward supplies of taxable goods and/or services affected claiming input tax credit.||Registered Taxable Recipient||15th of the next month|
|GSTR-3||Monthly return on the basis of finalization of details of outward supplies and inward supplies along with the payment of the amount of tax.||Registered Taxable Person||20th of the next month|
|GSTR-4||Quarterly return for compounding taxable person.||Composition Supplier||18th of the month succeeding quarter|
|GSTR-5||Return for Non-Resident foreign taxable person||Non-Resident Taxable Person||20th of the next month|
|GSTR-6||Return for Input Service Distributor||Input Service Distributor||13th of the next month|
|GSTR-7||Return for authorities deducting tax at source.||Tax Deductor||10th of the next month|
|GSTR-8||Details of supplies effected through e-commerce operator and the amount of tax collected||E-commerce Operator/Tax Collector||10th of the next month|
|GSTR-9||Annual Return||Registered Taxable Person||31st December of next financial year|
|GSTR-10||Final Return||Taxable person whose registration has been surrendered or canceled.|
|GSTR-11||Details of inward supplies to be furnished by a person having UIN||Person having UIN and claiming refund||28th of the month following the month for which statement is filed|
The Best GST Softwares
As GST is all set to bring a historic change in the indirect taxation system in India. A number of established, as well as startup companies, are emerging to support this new tax with a wide range of accounting software.
Some of the popular GST accounting software names that we tend to hear these days are:
- Tally.ERP 9
- Cleartax GST Biz
- Zoho Books
- MARG ERP 9+
- Quick books
They have been equipped with features to help businesses and service providers follow proper accounting processes, make you GST compliant and adhere to the new provisions.There might be a lot more to add to the list.