The implementation of the Goods and Services Tax (GST) has brought significant changes to the Indian taxation landscape, aiming to simplify the complex and fragmented tax system. As small and medium enterprises (SMEs) are the backbone of the Indian economy and major contributors to the GDP, understanding the impact of GST on these businesses is crucial. GST replaces various central and state taxes with a unified tax system, streamlining the process and potentially easing the tax burden for small businesses. However, with any major reform, there are both benefits and challenges. This article explores the pros and cons of GST from the perspective of small businesses to determine if GST has truly been beneficial.
Impact of GST on Small Businesses
With the implementation of the Goods and Services Tax (GST), small business owners are keenly assessing its impact on their operations. Recognized as primary growth drivers of the economy and major contributors to the GDP, SMEs (Small and Medium Enterprises) play a critical role in the nation’s economic landscape. GST aims to simplify the taxation system, replacing complex and outdated central and state taxes with a unified tax structure.
The Goods and Services Tax in India is an inclusive indirect tax on the sale of goods and services, levied based on the market value at each stage of the distribution network. It succeeds the Value-Added Tax (VAT), Central Sales Tax (CST), and Service Tax, marking a significant shift in tax collection and administration.
1. Simplified Business Launch and Expansion
Under the previous tax regime, businesses operating across multiple states had to register for VAT with each state’s sales tax department, navigating various tax rules and incurring multiple procedural fees. GST centralizes registration with uniform rules across all states, simplifying the process. Entrepreneurs can now complete an online form to obtain a GST Identification Number (GSTIN), making it easier to launch and expand businesses.
3. Streamlined Taxation Process
GST addresses the issue of cascading taxes by merging multiple central and state taxes into a single, unified tax. This removes the complications caused by overlapping taxes, ensuring a common return for goods and services nationwide. Business owners now deal with fewer tax authorities, as GST mandates that the relevant authority is either the Central or State government, reducing administrative burdens.
3. Reduced Logistics Costs
The previous tax regime posed significant challenges for the transportation sector, with long queues at checkpoints and inter-state entry points causing delays and additional costs. GST replaces the Central Sales Tax (CST) on interstate sales with the Integrated Goods and Services Tax (IGST), collected by the Central Government. The removal of border taxes and checkpoints facilitates faster movement of goods, reducing transportation time and costs, and improving overall logistics efficiency.
4. Elimination of Goods and Services Distinction
Previously, businesses had to calculate VAT and service taxes separately for goods and services. GST eliminates this distinction, allowing tax to be calculated on the final total rather than individual items. This simplification benefits SMEs by streamlining invoicing and reducing tax-related complexities.
4. Increased Threshold Limits
Under the old tax system, businesses with moderate annual turnovers were required to register for VAT. GST raises the threshold limit, exempting businesses with turnovers below ₹20 lakh (₹10 lakh in North Eastern states) from registration and tax payment. Additionally, businesses with turnovers between ₹20 lakh and ₹50 lakh can benefit from the composition scheme, paying GST at a lower rate. This alleviates the tax burden on startups and small businesses.
5. Enhanced Logistics for Small Businesses
GST has removed the need for multiple warehouses across states, enabling logistics players to consolidate storage, optimize inventory management, and reduce maintenance costs. The elimination of check posts and border inspections has further reduced transportation time and costs, increasing operational efficiency and customer satisfaction.
6. Increased Compliance for Manufacturing Startups
While GST lowers the turnover limit for excise duty from ₹1.50 crore to ₹20 lakh, increasing the tax burden for many manufacturing startups, it also mandates compliance with the new tax regime. Startups must adjust to these changes and adhere to GST rules and regulations.
7. Easier Business Operations
GST simplifies the process of starting and expanding businesses by centralizing registration and reducing the procedural complexities associated with multiple state tax rules. This has led to a rise in SME loans from non-banking financial companies (NBFCs) as businesses find it easier to launch and grow under the GST regime.
8. Streamlined Tax Filing
GST replaces multiple cascading taxes with a unified tax, reducing the tax burden for over 60% of small dealers and traders. The GST Council has also increased the threshold turnover for the composition scheme, allowing SMEs to pay lower taxes without cumbersome formalities. Filing and compliance have been simplified, providing much-needed relief to small businesses.
9. Improved National Market Access
GST provides small businesses with access to a common national market, eliminating state-specific barriers and enabling easier movement of goods. This offers smaller businesses and startups greater opportunities to expand and compete in larger markets.
11. Reduction in Cascading Tax Effects
By consolidating multiple indirect taxes into a single tax bracket, GST eliminates the tax-on-tax effect, providing significant benefits to businesses. This streamlined system supports businesses with reduced tax burdens and simplified compliance procedures.
Overall, GST has brought significant changes to the taxation landscape in India, with both positive and challenging impacts on small businesses. By simplifying tax registration, reducing logistical costs, and eliminating the distinction between goods and services, GST aims to create a more efficient and business-friendly environment for SMEs and startups.
Read more
- How to Get GST Number: A Step-by-Step Guide
- Online GST Registration – Features ,Benefits and Process
Conclusion
The implementation of the Goods and Services Tax (GST) has significantly benefited startups and small businesses by reducing tax liabilities and simplifying the tax framework.
GST has streamlined tax registration, reduced logistical costs, and eliminated the distinction between goods and services, creating a more favorable environment for startups. However, challenges like complexities in claiming input tax credits, multi-tier GST slabs, and increased tax filing frequency persist. Professional services like BizAdvisors can help businesses navigate these issues effectively.
Overall, GST has reformed India’s taxation system, offering significant benefits to startups and small businesses. As it evolves, GST is expected to further enhance business operations and support the growth of startups across the country.
