Assessing the Impact of the GST on Startups and SMEs of India

With Parliament approving four supplementary legislations for the Goods and Services Tax law, the stage is all set for the rollout of the radical tax reform. The GST should see implementation by the July 1, 2017 deadline. Let's find out how the GST will impact startups, SMEs, and small businesses.

The GST would be collected at every stage and would be calculated using the input tax credit method. According to this mode taxes that were paid for purchase of goods and services in other states can be claimed. This will allow GST-registered companies and enterprises to be able to cut costs since they will be able to claim out-of-state expenditure during the normal course of business activities.

“For example, if I buy a product in another state, then the duties that I pay comprise taxes that finally accrue to my costs as I am not able to claim tax credit in my home state. Consequently, some businesses may be tempted to purchase goods without proper documentation and thus avoid paying taxes. However, in case I am a GST-registered enterprise, then I can claim that tax credit proportionate to the GST,” said Shashank Dixit, CEO, Deskera, a global cloud provider that makes accounting software.

Additionally, the GST doesn’t discriminate between the goods and the services and will therefore tax both of them at a flat rate. This will remove the multiplicity of taxes and hassles of computation, leading to improved collections and participation in tax net and improving the overall ease-of-doing business. With businesses and enterprises saving on taxes as well as complexities, companies stand to gain. Moreover, the new tax law will remove the root cause for the temptation for tax evasion and help in streamlining supply chains.

GST might level playing field between SMEs and corporates
Under the current regime, big corporate houses ‘stock transfer’ goods from one state to another since they have logistics and infrastructure capabilities. They, thus, escape paying taxes on inter-state transfer and movement. Due to limited resources and infrastructure, SMEs and startups aren’t able to do that. They, in fact, get goods through inter-state sales (rather than stock transfers). Consequently, such enterprises generally have to shell out Central sales tax. In this regard, the GST brings parity between small players and big corporate houses as it taxes stock transfers too.

Also, since the GST tax reform reduces the multiplicity of taxes, compliance costs should come down. Moreover, the usual turf wars between the Center and states due to the current differential tax regime will also reduce. Logistic inefficiencies, including slow transit times, red tape and disruption in business climate, should also go down.

Disadvantages for startups and SMEs due to GST implementation
A number of SMEs don’t view the GST as good news; they point out the disadvantages arising out of the principle of equal treatment for small and medium enterprises (SMEs). The new tax proposes to lower tax exemption limit for manufacturing units. Under current laws, a manufacturer, who has a turnover of less than Rs. 1.50 crore, doesn’t pay any duty. However, the GST proposes to lower the exemption limit for such units. According to some estimates, it could be brought down to Rs. 25 lakh. This will bring a large number of SMEs in the tax net.

“Earlier, we didn’t pay that tax. But after GST, I may have to bear extra monetary burden. My coir-making business may not continue to be profitable anymore,” said Dennis Jesudasan, an SME from Kerala.

Besides those affected by the principle of parity, there are several others sitting on the fence, adopting a wait-and-watch policy. That actually is the best option till the GST implementation happens.