The Goods and Services Tax (GST) is likely to be passed in Rajya Sabha today. It has been a long time coming.
Having been introduced in the 2006-07 Union Budget, the bill should have been implemented in 2010-11, but it has taken five more years for this to happen. Given the work involved once the bill is actually passed – rates need to be fixed, rules need to be framed, the Union and state governments must reach a consensus, infrastructure for registration and return filing needs to be in place – we can expect its implementation to still be some time away.
In the meantime, let’s understand why startups should be very happy about the passing of the GST.
Impact on startups
Lower taxes for small businesses: Currently, VAT applies uniformly to businesses with a turnover greater than INR 5 lakhs in most states. Operations with a revenue of INR 10 lakhs to INR 50 lakhs can opt for the VAT Composition Scheme (which would lower the tax rate), but that has a separate criteria and isn’t suitable for everyone. However, with the GST, tax burdens will be heavily reduced for businesses with a turnover of INR 10 lakhs to INR 50 lakhs, and those with a revenue less than INR 10 lakhs need not apply for GST at all.
Simpler compliance, easy expansion: To check ease of doing business in any country, the main criterion is the number of steps involved in starting a business.
Given that most Indian entrepreneurs need to register a company, get a service tax registration, a VAT registration in every state they operate from among other factors, India fairs poorly when it comes to ease of doing business.
The GST is a game-changer in this sense. It requires entrepreneurs to get just one license for their company and once that’s done, it won’t matter just how many states you do business in, so long as you pay the tax. Business expansion will now be seamless.
One registration, one return: Let’s take the example of a restaurant owner. Such an entrepreneur would need to apply for VAT registration once his/her revenues reach INR 5 lakh, service tax at INR 10 lakh, pay Octroi on goods entering the state at one rate, and entertainment tax if any live act is playing at the venue. This is too much to keep track of. With the GST, there will just be one registration and a common tax rate. This leads to complete uniformity. For the accounts departments, tax payment will be simpler, as will return filing.
Inter-state trade made simple: Many entrepreneurs do not operate currently beyond state borders because of issues with taxation and clearance. There are needless fines and other nuisances. With the GST, all states in India will have the same tax rate and bring down logistical costs for many businesses.
Why GST is important
A much-needed reform of India’s labyrinthine indirect tax system, the GST bill will have a radical impact on Indian businesses with regard to all taxation. The tax structure of products and services will change, taxes on products and services will be streamlined, the effort involved in compliance will reduce substantially and tax payment will be made more efficient.
All taxes come under one tax: The GST will consolidate Central Excise Duty, Service Tax, VAT, Central Sales Tax, Customs Duty, Central Surcharge & Cess, Octroi, Luxury Tax, Entertainment Tax, Purchase Tax along with a few other indirect taxes. The GST will be applied on all goods and services, barring alcohol. Even petrol and petroleum products will eventually be subject to it.
Universal decision-maker: Taxes such as VAT are currently decided by every state. This makes compliance an issue for companies with pan-India operations. With the GST, power to enact laws will only rest with the Union.
The centre will also decide the levy of taxes on inter-state supply of goods and services. As per the GST, a 1% origin-based tax will be earned by the state government from where the goods are being transferred.
Ease of doing business: Given its importance to the world economy, India has scared away many emerging entrepreneurs with its painful compliance requirements. The GST will change this for Indian and foreign entrepreneurs looking to set up shop in India.