Impact of GST on Start-ups

Ashish M. Shaji

16 Oct, 2020

Introduced as the One Hundred and First Amendment Act of The Constitution in the year 2016, GST or the Goods and Services Tax Act is the most recent modification or reform to the indirect tax act of the government of India. The GST Council is responsible for the implementation of Goods and Services Tax in each state and each individual sector and industry existing in India. The Union Minister of Finance of India would act as the chairman of the GST Council.

 Let us try and understand what will be the Impact of GST on Startup Sector in India.

GST- Unifying indirect taxation

GST is considered to be a reform in the taxation scheme followed in India. It is said to unify indirect taxation in precisely two ways:

• Uniformity would be achieved in terms of tax rates across the states: India is basically a federal country where the jurisdiction, rights, and responsibilities of the individual states and the centre at large are clearly demarcated. The gambit of indirect taxation until this date has been under the state government and thus, each state followed a different taxation slab for different goods and services. GST would bring in uniformity in terms of tax rates across the states thus making it one nation and one price.
• Uniformity would be achieved in terms of taxation itself. Under the current taxation scheme, multiple taxes are imposed upon each stakeholder at each level of the supply chain. GST would subsume all such taxes into one common tax, which has to be paid by the various stakeholders. Thus, GST would clearly help in avoiding double taxation, which has been complained about regularly.

An introduction of GST regime would finally try to unify all the individual states of the largest democracy of the world, India, at least in terms of indirect taxes paid by the residents of the country. In turn, the implementation of GST would lead to easier enforcement and efficient administration of the tax system. GST would also reduce the burden of multiple taxing from consumers. Implementation of GST would also enable free movement of goods and services within the country from one state to the other, thus making the availability of such goods and services easier. The implementation of GST is also important for reducing overall paperwork and time lags in the entire economic system of the country.

Start-up Sector in India

A start-up, according to the definition of the government of India, would include all those firms and business initiatives which stand to fulfil the following propositions. The organizations which:

• Are incorporated or registered within the physical geography of India for not more than five years;
• Have an annual turnover of not more than INR 100 crores in any of the previous financial years; and
• Have been working towards developing, innovating, deploying, and commercializing new products, services, or processes. Such products, services, and processes should be driven by technology or intellectual property.

Start up India Campaign

For all such start-up organizations, the government of India has launched the Start-up India Campaign. The main motive behind this campaign is to invite innovative brains to start their entrepreneurial innovations in India. This would help in increasing employment, empowering entrepreneurship, and boost economic growth within India. In order to facilitate this growth, the government of India in accordance with the Department of Industrial Policy and Promotion has laid down a 19 point action plan, which aims to reduce hindrances in the process of such entrepreneurial ventures while promoting and supporting their growth, both in terms of revenues and reach.

The main idea behind the launch of such an initiative has been the gap analysis where people with the requisite talent, ideas, innovative abilities, and capabilities are unable to utilize their abilities completely due to the lack of resources. The government of India, through this initiative, wants to accelerate economic growth and create wealth by utilizing these fertile brains effectively and efficiently. The 19 point action plan, also known as the Start-up India Action Plan, visualizes the formation of several incubation centres across the country. This action plan, further, tries to ease the process of the setting-up of business, tries to ease patent filing, provide requisite tax exemptions, provide an INR 10,000 crores corpus fund, and provides a faster exit mechanism, among other benefits.

According to performance indices, as published by reputed sources, India has performed fairly well during 2016 at least in terms of a number of firms. India stands at a third position in terms of the start-up ecosystem in the world economy, ranking just below US and UK. But such reports present a grim report in terms of performance of such start-ups in India. The start-up sector in India has been found to be stagnating. The total funds raised by the start-ups in India have been found to decline by almost twenty per cent on a year-on-year basis in 2016.

Impact of GST on Startup Sector

The One-Nation, One-Tax Regime under GST is assumed to prove beneficial for the start-up sector. Some of the impact of GST on startup sector is as below:

• Simplification of Procedures: The mandatory procedures for a start-up right from the registration to file gst returns have been made online, thus simplifying the entire procedure.
• Simplifying Taxation: Since GST subsumes all the other taxes into one tax scheme, time and resources spent on meeting all such tax compliance are reduced and the process of tax compliance is simplified, too.
• Option to enjoy Tax Credits on their Purchases: Many Start-ups in the service industry have to pay service tax^[1]. Under GST, they can set off the VAT paid by these start-ups while making essential purchases for their businesses with the service tax they ought to pay. This is bound to reduce costs while increasing working capital for these start-ups.
• Reduced Tax Burdens and Increased Registration Thresholds: Under the current taxation regime, business start-ups with a turnover of more than INR 5 lakhs get to register under Value Added Tax (VAT) and pay VAT, though this figure changes from one state to the other. Under the GST regime, this limit of GST registration has been increased to INR 40 Lakhs, thus exempting small businesses and start-ups from registration. These start-ups, further, enjoy lower taxes for businesses with turnovers of INR 20-50 Lakhs under the composition scheme, though this is optional for the organizations. Such lower taxes are bound to provide relief for the start-ups.
• Increasing efficiency of the supply chain: With the implementation of GST, the supply chain and the movement of goods and supplies would gain efficiencies. Even the logistics industry across the country would have an easier flow of goods and supplies from one state to the other, thus improving the efficiency of a supply chain for the start-ups, while making their business practices effective and efficient.

Does the start-up sector in India stand to gain from the Implementation of GST?

The biggest tax reform of India since its independence in 1947, GST is presumed to transform the economy of India. As far as the Indian start-up sector is concerned, GST would provide a positive atmosphere to propel the growth of start-up ecosystem due to the reduction of processes and hindrances, and be streamlining of the entire tax compliance process. Thus, the Indian start-up sector is bound to gain considerably by the implementation of the GST regime.

Conclusion

GST is an entirely new tax regime which requires to be understood well and especially impact of GST on startup, thereby reap the rewards out of it.

Read our article:Composition scheme under GST & Presumptive Taxation Scheme