Tracing the start
The Goods and Services Tax (GST) is possibly the single biggest & most debated taxation reform in India since Independence according to the CBEC. GST was first proposed in the year 2000. India has chosen the Canadian model of dual GST and is till now only the second country to adopt this model. France was the first country to implement GST back in 1954. Till now around 160 countries have adopted GST. GST replaces the various taxes levied and collected by the Centre & State with a single tax legislation & structure.
(i) Central taxes that are subsumed under the GST are:
a. Central Excise duty
b. Duties of Excise (Medicinal and Toilet Preparations)
c. Additional Duties of Excise (Goods of Special Importance)
d. Additional Duties of Excise (Textiles and Textile Products)
e. Additional Duties of Customs (commonly known as CVD)
f. Special Additional Duty of Customs (SAD)
g. Service Tax
h. Central Surcharges and Cesses so far as they relate to supply of goods and services
(ii) State taxes that would be subsumed under the GST are:
a. State VAT
b. Central Sales Tax
c. Luxury Tax
d. Entry Tax (all forms)
e. Entertainment and Amusement Tax (except when levied by the local bodies)
f. Taxes on advertisements
g. Purchase Tax
h. Taxes on lotteries, betting and gambling
i. State Surcharges and Cesses so far as they relate to supply of goods and services.
GST is purely a destination-based consumption tax levied at multiple stages of production and distribution of goods and services.
The tax is applicable on transaction value which includes packaging, commission and other expenses incurred during sales & services. It allows full tax credit from inputs and capital goods on procurement which can later be set off against the GST output liability.
The goods and services are considered alike and within the supply chain, they are taxed at a flat single rate till the customers can access them. India has the maximum tax slab of 28%, second being Argentina at 27%. The Indian GST model has a 4 rate structure i.e. 5%, 12%, 18% & 28%.
India is a global manufacturing hub and SMEs form around 90% of the industrial units in the country, according to IBEF. The ‘Make In India’ campaign promoted by the Indian government will get a boost with the rollout of the GST. The tax reform thus gives equal footing to large enterprises and SMEs and taxes the stock transfers uniformly.
Positive Impact of GST on SMEs & Startups
As per industry experts, SMEs and startups will be affected the most with the rollout of the GST and the impact will be favourable in ways more than one. Some of the ways GST will benefit SMEs and startups are:
- Ease of starting business: A business having operations across different state needs VAT registration. Different tax rules in different states only add to the complications and incur a high compliance & procedural fees. GST enables a centralised registration that will make starting a business and the consequent expansion easier.
- Reduction of tax burden on new businesses: As per the VAT structure, businesses with a turnover of more than INR 5 lakh had to mandatorily get themselves registered with the VAT authorities. The government mulls the exemption limit under GST to INR 25 lakh giving relief to over 60% of small dealers and traders lowering compliance burden.
- Improved logistics and faster delivery of services: Under the GST bill, no entry tax will be charged for goods manufactured or sold in any part of India. As a result, delivery of goods at interstate points and toll check posts will be expedited. According to an estimate by CRISIL, the logistics cost for manufacturers of bulk goods will get reduced significantly by about 20%. This is expected to boost e-commerce across the national frontiers.
- No distinction between goods and services: GST ensures that there is no ambiguity between goods and services. This will simplify various legal & regulatory proceedings related to the packaged products. Henceforth there will no longer be a distinction between materials and services rendered, which will greatly reduce tax evasion across the country.
- Online registration: Online registration will ensure timely receipt of certificate of registration and minimal bureaucracy interface.
- Greater Transparency: Electronic compliance will bring transparency and will also reduce the compliance burden & cost.
- Easy refund: Electronic refund procedures will fast track the process and enhance liquidity for SMEs.
- E-filing of all returns: All returns are required to be filed electronically and input tax credit and tax liability adjustment will happen automatically on the basis of these returns.
- Boosting the manufacturing sector: With the implementation of GST, it is expected that the burden of tax will reduce both for the manufacturer and the end user, as the manufacturer will get the benefit of input tax credits and the end user will have to pay only the tax charged by the last dealer or the retailer in the supply chain. Subsequently, the competitiveness and the demand for the ‘Made in India’ products would increase immensely.
Challenges of GST for SME sector
As per the experts in the area of taxation laws have no doubt that GST is aimed to increase the taxpayer base bringing SMEs into its scope. It will put a heavy burden of compliance, filings & associated costs to them. The governments at central & states in their interest will be aiming to generate higher share of revenue in their treasuries:
- Negative perception of traders/businessmen: A sizeable portion of SMEs are of the opinion that GST is not all good for the sector and their fears may not be totally vacuous. The tax neutrality that the SMEs enjoy may be one of the prominent benefits. However, reduction in duty threshold is one of the key concerns that has led them to be wary of the GST Law. Under the existing excise tax, no duty is paid by a manufacturer having a turnover of less than INR 1.50 crores.
- No difference between luxury goods and normal goods: GST regime won’t differentiate between luxury goods and normal goods this will make it hard for the SMEs to compete against large enterprises.
- Increase in the cost of products: GST that is ultimately levied on supply will not be available for input credit. This will lead to an increase in the cost of the products for businesses that supply directly to end users.
- Registration cost & formalities: Not all the SMEs have technical expertise to deal with online systems, thus most of them will need intermediaries to obtain registration for them. This will add to their registration cost.
- Liquidity issues: Since funds are required to be maintained in the form of electronic credit ledger with the tax department, it may result in liquidity crunch.
- Complicated refund procedure: Refunds can be claimed only after filing of relevant returns matching & reflecting the refund amounts in the returns. Also it depends on the compliances done by the supplier and his rating.
- Heavy compliance burden & cost: Minimum of thirty-seven returns are required to be filed by every registered taxpayer during a financial year. Thus SMEs will have to deploy additional resources and eventual cost of compliance will increase. This will ultimately put burden on the shoulders of the consumer.
- Multiple registrations for Pan-India businesses: Under the new regime, a business will have to register online for GST in every state involved in its sales process. If your business delivers goods across 5 states, then you’ll have to register for GST in those 5 states to carry out your business activities. Since the entire registration process takes place online, small business owners who are not used to working online might not find the transition easy.
- Registration will be mandatory for e-commerce suppliers and operators: Businesses carrying out activities related to e-commerce should register under GST irrespective of their annual turnover rate. Unlike other types of businesses, e-commerce firms will not be eligible for threshold exemptions or for the Composition Scheme (which allows firms to file their tax returns on a quarterly basis instead of 3 times a year and pay taxes at a much lower rate). Also, e-commerce firms should register for GST in every single state where they supply goods.
The Final Verdict
The impact of GST on SMEs across various industries will vary greatly. It is quite natural for a pervasive, country-wide tax reform, as GST is, to have a mixed reaction. Furthermore, the revolutionary tax regime will have acceptance that will vary from state to state. But in the long run, GST will make SMEs more competitive with a level playing field between large enterprises and them. Furthermore, Indian SMEs would be able to compete with foreign competition coming from cheap cost centres such as China, Philippines and Bangladesh. GST is a welcome step towards growth interest, progress of the country. Overall, the new tax proposals under GST will have a mixed verdict. In essence, the GST’s effect on the entire Indian economy will have to be scrutinised in totality to reach a widely accepted conclusion. GST ushers a revolutionary change in the taxation system with the 'One Nation, One Tax' motto. People should be prepared nationwide to accept this change & march ahead.
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