Today is a historic day of independent India as one hundred and twenty second amendment bill of The Constitution of India introduced GST today. Goods and Service Tax (GST) was first proposed in 2000 under the Atal Bihari Vajpayee government; it got the president’s approval on September 2016, and implemented 17 years after it was first proposed, on 1st July 2017.
GST is primarily a form of indirect tax. Indirect taxes are those taxes that are collected by an intermediary (for e.g. a retail store) from the person who put up with the ultimate economic saddle of the tax (such as the consumer, or us). For example, if a retailer is charged a tax of 14%, he can pass on the burden to the consumer by marking up the product’s price by 14%. There was no other way for the retailer to recover whatever he paid from his own pocket during the previous tax regime and therefore, he had no choice but to recover it from the customer. This is where GST will play a vital role, especially for SMEs or Small and Medium Enterprises. Post implementation, Goods and Services Tax will address this issue. It has a scheme of Input Tax Credit which allows the members of the value chain to claim the tax already paid. This will be done in order to decrease the final liability on the consumers.
GST is a multi-stage tax as well, i.e., it will be levied on each and every step of a product from buying the raw material to the final sale to the customer. In simple words, GST will be levied on all transactions that take place in the entire manufacturing chain. For example, if a manufacturer manufactures a T-shirt, he will follow some steps, such as buying the raw material, produce/manufacture the T-shirt, sale the product to the wholesaler who in turn sells it to the retailer and then the T-shirt is bought by the consumer. According to the rules that are to be followed post GST implementation, all of the above mentioned processes or value additions will be taxed.
Another term associated with the GST is the destination based taxation. Assuming that the entire manufacturing process of a jute bag is happening in West Bengal and the final sale is happening in Maharashtra. Since GST is imposed at the point of consumption, therefore the state of West Bengal will be getting revenue in the manufacturing stages, however, it will lose out on the revenue as and when the product moves out of West Bengal and reaches the end user in Maharashtra. This essentially means that Maharashtra will earn that revenue on the final sale as GST is a destination-based tax and the final product is sold in Maharashtra.
GST can be of three types – CGST (Central GST), SGST (State GST), and IGST (Integrated GST). In CGST, the revenue generated will be taken by the central government. In SGST, the revenue will be collected by the state governments and in IGST the tax will be collected by the central government for inter-state sales. For example, if Tamil Nadu gets an amount of 1800 by selling a product priced Rs. 10,000 at 18% GST in Tamil Nadu only, 900 will go to the central government and Rs 900 will be the earning of the Tamil Nadu government as 18% is divided amongst the two-CGST (9) and SGST (9%). However, if the good is sold in Kerala for example, then the dealer has to charge 18,000 (on a product worth 1,00,000) as IGST (that will be collected by the central government) in addition to 9% CGST and 9% SGST, if the GST rate is 18% overall.
GST is likely to be very advantageous for startups/SMEs/MSMEs/SMBs. India has around 3 million SMEs that contribute to around half of the industrial output and around 40% of India’s export. Therefore, it is very essential that the effect of GST on these businesses be analyzed. There are certain aspects of GST that need to be taken into consideration before the impact analysis. In the present regime, startups were expected to register themselves to pay the taxes if the total turnover was more than 10 lakhs. However, post GST implementation; this threshold will rise to 20 lakhs, which will certainly benefit the SMEs and the small startups. Small companies lack manpower and it used to be very tedious for them to register themselves to all the taxes that were to be paid, but from now on, they will have to register once, and pay a single tax. There were various taxes that these small startups pay, such as VAT and layered state taxes. Some companies had to maintain separate warehouses in different states. After the GST is implemented, these costs will fall eventually resulting into a decrease in the production and logistics cost. In the current tax regime, big companies procure goods based on locality of the SME to reduce the overheads. Therefore the SMEs limit their customers within state because eventually they bear the burden of tax on interstate sales, thereby reducing their customer base. Post implementation of GST, this will be nullified as tax credit will be transferred without depending on the location of buyer and seller. This in turn will allow SMEs to expand their reach without thinking about geographical boundaries.
The concept of tax credit is likely to encourage the growth of startups and SMEs significantly. Under GST, startups, especially in the service industry, can get a rebate on the total of the VAT paid on the purchases and the service tax on their sales, which is not permitted under the current tax regime. For example, let us say a company buys office supplies worth Rs. 100 at 5% VAT. After that, it gives services worth RS 200. Now, it has to pay a service tax of 15%. Therefore, the total tax it pays will be 5% of 100 plus 15% of 200, which is Rs. 35. However, under GST, if the offering of the company falls in the 18% bracket, the company has to pay 18% of 200. But, the company can enjoy a rebate of Rs 18 (tax levied for office supplies worth Rs 100) under GST norms. Therefore, the effective tax that the company has to pay under GST is Rs. 36 (18% of Rs 200) minus Rs. 18, i.e. Rs. 18. The company in the above example has saved just less than 50% of its tax. This reduction in cost will result in the rise of the working capital for the small companies that in turn will propel the growth of these startups/SMEs/MSMEs/SMBs. Moreover, GST need real time compliance which will enable transparency of operations and therefore, it is very likely that after the initial snags fade down, there will be huge inflow of foreign investments in startups and SMEs. Additionally, businesses with turnover between Rs 10 and 50 lakh are to be taxed at lower rates than previous tax regime, which will further propel the growth of newly established start up and small businesses.
IT related startups are likely to rise as well because the government is eyeing on digitization through the implementation of GST and GSPs or GST Suvidha Provider. GST will also aid the startups to get investment in a more transparent way as GST is likely to track all data and performances online.
There isn’t an iota of doubt that the GST is intended to augment the taxpayer base, especially SMEs. However, in the long run, the goods and service tax will be able to make these SMEs more competitive by offering a level playing field with the large organizations. Moreover, the Indian SMEs are likely to be able to compete at an international level, especially with the companies coming from cheap cost centers such as China. These startups/SMEs/MSMEs/SMBs are all set to become global entities in the coming years.