Introduction

One significant change to India's tax structure is the Goods and Services Tax (GST), which is sometimes referred to as "One Nation, One Tax." It substitutes a single, unified tax for several indirect taxes, such as excise duty, service tax, and VAT. For startups—new companies in the early phases of development—this new system offers both benefits and drawbacks. In this blog, we'll examine the basic effects of GST on startups.

What is GST?

From production to the last sale to the customer, goods and services are subject to the Goods and Services Tax (GST). Both the federal government and the states collect it. GST aims to increase transparency and streamline the tax system.

Positive Effects of GST

1. New registration processes are stricter.

Companies that earned revenue exceeding Rs. 5 Lakhs were required to register for VAT before the GST came into effect. It was hard for small startups because they had to pay tax on even their meager earnings. Under GST, the registration limit has been raised to Rs. 20 Lakhs which means that new businesses with revenue less than Rs. 20 Law would not need to register for GST and would be able to focus on growing their business instead of paying tax.

In addition, small businesses whose turnover is between Rs. 20 Lakhs and Rs 1 crore may also opt to pay lower tax by using the composition scheme. This is very beneficial for new startups with limited resources.

2. Sales Tax Credit

Businesses tend to purchase items such as materials, machines, and even furniture. Previously, they incurred VAT on these purchases without being able to claim it against any service tax liability they imposed on their sales. This resulted in increased tax payments. On the other hand, businesses that incur GST on purchases are entitled to tax credit. For example, a business whose office supply expenses is Rs 20,000 will claim an input tax credit of Rs 1,000. The business will also have to pay GST of Rs 1,000 (5%) and gets to claim GST credit of Rs 1,000 from GST charged on sales. Therefore, it reduces total tax paid.

3. Simplified Tax Compliance

Previously, young enterprises had to deal with various taxes like excise duty, service tax, and VAT, each with different guidelines and paperwork. This was hard and very time consuming for smaller enterprises. GST makes it automatic and simpler by integrating all of these taxes into one. Rather than submitting multiple tax declarations, startups have to file a single one. Time is saved while the number of tax professionals required is also reduced because the entire procedure from registering to filing tax returns is online.

4. Benefits for Startups Operating in E Commerce

Many of the online businesses that sell products and services are started from scratch. Before GST was imposed, they had to follow a multitude of VAT rules for different states. Take for example an online seller who ships to Uttar Pradesh. The seller had to submit a VAT claim together with the registration number of the delivery truck before the shipment was released. This made it even worse. Today, no matter where any of the eCommerce startups are located, as long as they have an Indian GST Number, they can operate anywhere countrywide without worrying body about state tax regulations.

5. No Longer Tax on Tax

Previously, taxes used to be charged on top of other taxes. A classic example would include the manufacturing burden starting with an excise plus an added VAT. With everything combined, the goods became more expensive. GST solves this problem because the value addition at each stage of a supply chain is taxed separately lowering the final price of products and services.

Negative Impact of GST

While GST offers many benefits, it also poses some challenges for startups.

1. The problem of traders that are absent

Startups are entitled to GST tax credit only if their suppliers have filed the returns and paid taxes. The next buyer within the chain is unable to make use of tax credit if one of the chain suppliers does not fulfill his tax obligation. This issue has been labeled as the missing trader problem. This is a significant concern for less established companies that have a low profit margin (about 5 and 10) like small startups. They could end up being worse off if they had to shoulder 18% GST without getting any tax credits coming their way.

Startups should avoid this by looking at vendor ratings on GSTN. Businesses should not be done with vendors that have low ratings and who possibly did not pay their taxes.

2. Challenges Faced by Independent Contractors 

All independent contractors who do not have a particular place of work, such as freelancers like writers, and designers as well as consultants must register as casual taxable persons under GST. Since they are not eligible for the Rs 20 lakh threshold exemption, even small freelancers must register for GST which in turn increases the level of compliance on their part.

3. Challenges With Technology

Under the GST scheme, all startups are required to register for, file tax returns, and remit taxes online. However, many small startups do not know how to operate these systems and may have to pay for the services of experts or to middlemen.

4. Reverse Charge Default Payment Mechanism

If a startup makes a purchase from an unregistered dealer, then the reverse charge mechanism will apply under GST. This means that the seller does not owe the tax, but the buyer (startup) does. The responsibility of paying tax shifts onto the buyer. Compliance cost burdens for small businesses has increased with the startup's obligation to generate an invoice and submit it into the GST List.

5. GST limits Input Tax Credit Claims – Specifics Needed

A startup qualifies for tax credit under GST only when all of its net suppliers have paid their respective taxes on time. If the payment by the supplier is delayed, then the startup runs the risk of losing the tax credit, which can create cash flow problems.  

6. New SMEs Are Subject To Swapping Higher Taxes – New Manufacturing Businesses

Before GST came into force, manufacturing firms with annual turnover of less than Rs. 1.5 Crore were not liable to pay excise duty. This has now substantially expanded, and they came into the fray under the GST regime. This cap has, however, come down to Rs. 20 Lakhs under the GST regime, which means that a whole lot of small manufacturing startups will now be paying GST which ups their tax outgo.  

7. More Reluctance Alter Goods Offered 

Under GST, manufacturers are facing a higher tax burden, which will make the price of goods and services supplied more expensive. Because this expense is more likely to be borne by the end user, Startups may experience reduced demand for the offering of certain goods and services.

Conclusion 

Startups face pros and cons when it comes to GST. Helping small enterprises, reducing the tax burden for them, increasing interstate trade, and simplified taxation are the positives. However, the cons include cashflow problems, increased compliance costs, and reductions in product demand.

With time, it is assumed that GST will support startups due to the creation of a single national marketplace.It is always important for startups to consider the problems and plan in order to resolve them. By considering the GST policies and cleverly implementing technology, startups can mitigate the negative impacts while fully employing  it in the favourable areas.

In summary, while there are certainly some hurdles in implementation, burdens in the short term, and easing those hurdles will take a careful approach, the GST is fundamentally a step forward for India’s economy. In the long term, it is very likely to assist in the growth of startups.