Understanding GST: Impact on SMEs, startups, and small businesses: Part 3

The Goods and Services Tax (GST) law has gone a step further to see implementation by July 1, 2017 deadline. Indian Parliament approved four supplementary legislations for the historic tax reform. Let’s see how it could impact the functioning of startups, SMEs, SMBs, and other small players.

The GST will be collected at each stage and computed using the input tax credit method, according to which taxes paid on the purchase of goods and services in other states could be claimed. This would allow GST-registered enterprises to cut costs as they would be able to claim their out-of-the-state expenditure during the usual course of commercial activity.

“For instance, if I purchase a product A in some other state, then the duties that I pay there consist of taxes which eventually get added to costs since I cannot claim that tax credit in my home state. Some enterprises may be tempted to evade the system and purchase goods without documentation. But if I am a GST-registered enterprise then I can claim tax credit proportionate to the GST,” said Shashank Dixit, CEO, Deskera.

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Also, since the GST does not discriminate between goods and services and would tax both at a single flat rate, it will remove the multiplicity of taxes as well as the hassles accompanying their computation, eventually leading to better collections as well as improved participation in the tax net. With businesses saving on taxes and complexities, enterprises stand to gain from the development. Additionally, the step will de-incentivize tax evasion for enterprises and streamline supply chains.

GST may level the playing field between SMEs and big corporates

Under the existing regime, big corporates “stock transfer” goods to other states as they have the logistics and infrastructure, thus escape paying tax on interstate movement. But, owing to lack of infrastructure, SMEs and startups are unable to do that and get goods through inter-state sales (instead of stock transfers) and end up paying Central sales tax on them. In this respect, GST brings SMEs and startups at par with big corporates by taxing stock transfers as well.

“After the implementation of the GST, major Central and State taxes will get subsumed. This will reduce multiplicity of taxes, bringing down the compliance cost. Central sales tax will also be phased out,” said a tax official not wanting to be named. Another expert said: “The differential tax regime and tugs of war between the Center and the states results in inefficiencies which include slow transit times, needless red tape and disruption in business climate.”

Downsides of the proposed legislation

However, there is a sizable chunk of SMEs who don’t think the GST is all good news for the sector; they point out to the disadvantages of the principle of equal treatment being applied to small and medium enterprises. The GST proposes to lower the tax exemption limit for manufacturing units. Under the existing excise laws, no duty is paid by a manufacturer having a turnover of less than Rs. 1.50 crore. The GST, on the other hand, proposes to considerably bring down the exemption limit, according to some estimates to as low as Rs. 25 lakh. Consequently, a large number of SMEs in the manufacturing sector will come under the tax net.

“Earlier, we were not paying the tax, but after this policy comes into effect, I will have to bear the extra financial burden. My coir-making business may not remain profitable and I may have to look for other options,” said Dennis Jesudasan, a small business owner from Kerala.

Apart from those affected by the parity principle, there are many others sitting on the fence, who would rather adopt the policy of waiting and watching for the time being.

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