Small and Medium Enterprises breathed a sigh of relief with the implementation of Goods and Services Tax (GST) on 1st July 2017.
According in Investopedia, ‘The goods and services tax (GST) is a value-added tax levied on most goods and services sold for domestic consumption. The GST is paid by consumers, but it is remitted to the government by the businesses selling the goods and services. In effect, GST provides revenue for the government.’
In the previous tax regime, SMEs faced several issues in terms of taxation and registration. The processes such asrepeated registrations were a hassle. Businesses that operated in different states had to pay Value Added Taxes (VAT)according to the tariffs of that specific state. GST has not only made the business registration process simpler for small to medium business and start-ups. It has also introduced a centralized registration system, enabling new businesses and start-ups to kick-start their business hassle-freewith standardized procedure.
The last few decades have seen an upward trajectory with the rise of innovation, and ideas andis forecasted to keep rising further in the years to come. SMEs have also proven to be one of the most significant sectors of furthering the Indian economy, contributing to about 50% of the nation’s industrial output and 42% of its total exports. The implementation of GST is considered to be one of the most momentous tax reforms in the country.
In addition, GST has also simplified the complicated taxation system into a single and easy-to-follow taxation systemleavinga positive impact across the different sectors. Let’s unfold the impact of GST on start-up and SMEs.
Salient Features of GST
o Eliminates double taxation on goods (tax on tax)
o Measure to reduce the overall cost of goods and reduce inflation
o Administered by both State and Central Governments
a) How GST impacts the small traders/business owners
• GST is a centralized and standardized tax system;henceits implementation is uniform in all states. This has reduced the overhead price of setting up a new business or expansion of businesses.
• GST is a more transparent system as it cutsdown the number of indirect taxes levied on a product or service.
• GST eliminates cascade in taxation. It decreases overlapping and combines taxes levied on goods such ascentral taxes (customs duty, service tax, excise duty, etc.) and state taxes (VAT, luxury tax, purchase tax etc.). This makes the process simpler which is beneficial for smaller owners
• GST makes the taxation procedures convenient and hassle-free, ensuringminimal involvement of tax authorities
• With the introduction of IGST i.e. a combination of CGST and SGST,check-post and state border taxes have been eliminated, reducing overall logistics cost of a product.
• GST has made invoiceseasy to understand and calculate. Tax is now calculated based on the final total, instead of individual products and services. This helps in providing tax incentives to small businesses.
• As the overall price of a commodity has reduced, it has elevated the demand of the product/service in the market.
• Processes like registration of businesses, tax refunds, tax payments,and tax returns have all become automated. This has ensured precision, transparency and room for errors.
b) With GST, It’s Easier to Start a Business in India
Earlier, when starting a new business, individuals had to get their VAT registration done from their respectivestate’s sales tax department. Since, everystate had different regulations, procedures and levies for the registration, it wasquite a tedious process for businesses, especially thosewho had operations in multiple states to obtain licenses and comply with VAT regulations individually.
With the implementation of GST, this procedure has been eliminated and has been replaced by a central and standardized GST registration. Under the current regime, business no longer need to register and multiple times– as a single GST registration for a particular businessis applicable across the country. The process for GST registration has also been standardized, enhancing the overall experience of ease of starting a new business in the country.
c) Integration of Multiple Taxes in GST is a Boon
Earlieras products and services were taxed under VATimplemented by State Government and services were taxed under the service tax modus implemented by the Central Government. VAT differed in each state according to their compliance rules along with VAT procedures, VAT rates and VAT regulations which led to complications. In addition to individual VAT and Service Tax regulations, there were various other tax procedures that businesses had to comply with such as Alcohol tax, Central Sales Tax (CST), Luxury Tax, Purchase Tax, Additional Customs Duty, etc.
d)Sustaining in a Business is Now Easier with GST
Few years back, small businesses like B&B and restaurants which providedproducts and services as a package had to comply with VAT as well asservice tax regulations.
This had made the whole procedure complicated as they had to calculate individual taxes for transactions based on different rate of taxes for different items. With the introduction of GST, the distinction between goods and services has now been eliminated; making standard tax compliance easier. In addition, invoicing has become easier for businesses as a standard rate has been adopted.
Not only this, GST has certainly helped in moving the rank of India in Ease of Doing Business from 100th in 2016 to 77th in 2019.
By the substitution of as many as 17 levies andseveral cesses with a single taxation criterion has made filing simple and efficient, andhave also streamlined the system. With the help of GST Software, calculating and filing taxes for SMEs have become quite easy.
In addition, GST also has also impacted on traditional methods of accounting which were more prone to errors. GST has regulated enterprises to shift to digital technology and use accounting software instead of manual methods. This has been benefitting vendors, suppliers and customers greatly.
With more transparency in accounting, there is a surge in thefiscalcontribution from well-knownorganizations. Today, because of the reforms brought by GST, businesses have become more flexible in terms of their financial cycles.