In spite of the impasse over the Goods and Services Tax (GST) Bill, there is solid possibility that it may soon become law. Currently, it is stuck in the Rajya Sabha. For the first time, the comprehensive tax law will bring reforms marking a paradigm shift in the taxation system. It will affect businesses of all sizes, including startups.
India is witnessing a boom in startups, particularly those in the IT industry. According to a recent NASSCOM report the number of Indian start-ups is the fourth highest globally, at more than 3,100 start-ups. It also predicts that the number could increase to 11,500 by 2020. Of all these startups, more than 85% fail because of lack of funds and other reasons. In such a scenario, a new tax regime could a tricky proposition.
Changes sought by the GST
The tax law would be wide-ranging in its effect on the manufacture, sale and consumption of goods and services throughout India. It would replace various different taxes that the Centre and State governments charge separately. It would be collected at each stage on basis of the input tax credit method, in which taxes paid in other states can be claimed. This would allow registered enterprises to claim tax credit in proportion to the value of GST that they paid on the purchase of goods and services in other states as a part of their day-to-day commercial activity. Goods/services are not discriminated from each other and are taxed at a flat single rate in a supply chain till they reach the consumer.
Gains for startups and enterprises
First the good part. A number of experts think the GST would eliminate cascading or double taxation and enable a shared national market, leading to improved collections. They are also of the view that the tax would help businesses save on taxes overall and remove the complexity of taxes that enterprises have to encounter due to the various taxes levied at different stages. They also feel that the GST would prevent or at least de-incentivize the temptation for tax evasion.
“For instance, if I purchase a product in some other state, the duties that I pay there consist of taxes which eventually get added to costs since I cannot claim it in my home state. This leads to some enterprises getting tempted to evade the system and purchase goods without documentation. But if I am a GST-registered enterprise then I can claim tax credit proportionate to the GST that I paid while buying goods and services as a part of my regular commercial activity,” said Saurabh Gupta, an entrepreneur from Moradabad, Uttar Pradesh.
What is happening under the present regime is that big corporate houses “stock transfer” goods to other states as they have the logistics and the infrastructure to do that. Consequently, they escape paying tax on inter-state movement. However, startups and small enterprises are unable to do that as they don’t have the infrastructure. Therefore, they acquire goods through inter-state sales (in place of stock transfers) and end up paying Central sales tax. In this regard, the GST brings startups and small enterprises at par with big corporate houses by taxing stock transfers too.
“After the GST is implemented, most Central and State taxes will get subsumed, reducing the multiplicity of taxes and reducing the cost of ensuring compliance. Overtime Central sales tax would also be phased out,”
said a senior tax official not wanting to be named, adding:
“The differential tax regime between the Centre and states and the frequent turf wars between them results in inefficiencies, including slow transit times, unnecessary red tape and disturbance in the business climate.”
According to a recent study done by Deskera, a cloud-based business software provider in the Asia-Pacific region, the new tax law would improve competitiveness and efficiency of startups and enterprises while mitigating the cascading effect of the existing tax regime. It could also reduce the overall compliance cost incurred by the government along with de-incentivizing the prevalence and scope of black economy. This could ensure the overall growth of the economy.
Disadvantages of the proposed GST
There is a sizable number of startups that do not think the tax is good news; they say that the principle of equal treatment for startups and big corporate houses removes the safety net that they used to enjoy earlier. GST proposes to reduce tax exemption threshold for business units. Under the present excise laws, a manufacturer having turnover less than Rs 1.50 crore is not required to pay any duty. On the other hand, GST recommends significant lowering of the limit, which according to some reports could be as low as Rs 25 lakh. Subsequently, a number of startups would come under the tax net.
“I didn’t come within the tax ambit earlier, but with this policy, I would have to bear the added financial burden. My business may not continue to be as profitable as before. In the worst case, I may have to think of other options,” remarked Dennis Jesudasan, an entrepreneur from Kerala.
Besides those affected by the principle of parity, there are several others sitting on the fence, preferring to wait and watch for the time being.
Putting the negatives and positives together
If we look at the overall picture, the GST may be truly path-breaking in streamlining taxes in India, removing arbitrary exemptions, and making businesses more tax-compliant. However, it can also potentially present an extra financial burden for unstable startups.
There would be a price to be paid. Apart from training employees, processing invoices as per the new model and meeting compliance regulations, companies will have to modify their existing accounting software that is used to generate invoices and payroll.
The GST is a radical shift. It will affect every member of the society and the business world. The smallest change in the tax chain leads to a domino effect, affecting the entire structure from the top to the bottom. Businesses, particularly startups, need to brace for the changing regime. They must know which taxes to pay, how the tariffs apply, the quantum of the taxes and the procedures for calculation. But it is easier said than done. Looking at the radical nature of the reform, it’s best that the GST is tried out in a phased manner.