As a major tax reform, Goods and Service Tax (GST) unifies a variety of indirect taxes levied by the central and state governments. As a destination-based tax system, GST will be levied at various stages of production and distribution of goods and services. Various products and services will fall under one of the four GST tax slab rates – 5%, 12%, 18% and 28%. Hence, GST will make certain products and services more expensive, while bringing down the cost of other products and services. The GST Act further aims to include more small and medium enterprises in the tax payer base. That is why; GST impact will be different for different sectors, startups and SMEs. Some of them will see positive GST impact whereas for some other, the impact will be negative.
Assessing GST Impact on Small and Medium Enterprises
Reduced Tax Burden
In the pre-GST era, any enterprise with more than Rs 5 lakh annual turnover was required to pay VAT registration fees. But the GST Act increases the basic tax exemption limit to Rs 20 lakh for most states. The basic tax exemption limit for enterprises in the North Eastern States is also increased to Rs 10 lakh. Hence, the start-ups and SMEs with an annual turnover of Rs 20 lakh are not longer required to pay any VAT registration fee. The basic tax exemption limit will enable many SMEs to reduce tax burden and maintain positive cash flow.
Unification of Indirect Taxes
GST unifies a number of indirect taxes levied by both central and state governments. The enterprises are no longer required to pay taxes according to varying tax rules of states. Also, they are not required to complete VAT registration in various states. Hence, it becomes easier for SMEs to provide goods and services to customers across states. The centralized registration process will further simplify the process of starting a new business and expanding existing businesses.
Earlier, SMEs have to pay additional tax on interstate sale. Many SMEs were selling their products to customers living in same state to avoid paying additional tax. The additional tax burden was further dissuading many startups and SMEs to expand their businesses. The GST Act allows enterprises to avoid paying additional tax on interstate sales through tax credits. The enterprises can avail tax credit regardless of the geographical location of the buyer and seller.
Simplified Legal Proceeding
The GST Act does not differentiate between goods and services. Hence, the enterprises are no longer required to calculate VAT on goods and service tax on services. They can now calculate GST on goods and services at specific rates. The unified tax further eliminates the ambiguity related to material and service components of a transaction. Also, GST simplifies the legal proceedings related to both goods and services.
Reduced Logistic Cost and Time
The GST Act accelerates supply of goods across state borders by eliminating toll check posts. It further helps SMEs to avoid complex border tax and entry tax procedure. The elimination of border tax will bring down the logistical cost of bulk goods significantly. The reduced delivery time will help SMEs to provide faster and richer customer services. At the same time, the reduced logistical cost will help small businesses and startups to maintain a positive cash flow consistently.
Despite eliminating entry tax, GST Act requires SMEs to register for each state. For instance, if a small business supplies goods across seven states, it needs to be registered for GST in each of the seven states. Each enterprise has to spend some time in understanding the GST registration process and register for each targeted state. An entrepreneur can save time by completing the registration process online. Also, the initial registration will make it easier for the business to deliver goods smoothly across various states.
Monthly Return Filing
The GST Act requires SMEs to file 36 returns every year. Also, the enterprise needs to close its books of accounts on a monthly basis. If an enterprise fails to file relevant returns, it cannot claim refund. Likewise, the customers also cannot claim tax credit if the seller has not filed the relevant returns. Hence, the entrepreneur needs to file relevant returns and close their books on time. The return filing process may make it difficult for the entrepreneurs to focus exclusively on improving business processes and generate more sales revenue. Some enterprises will deploy skilled accountants to file returns on time.
On the whole, GST simplifies the entire indirect tax system in India. It further bridges the gap between large, medium, and small enterprise. Also, the new tax regime helps small businesses and start-ups to compete with global cost centres like China and Philippines. But the GST impact will vary from one enterprise to another.