If you are in doubt whether the Goods and Service Tax (GST) is necessary for you or not, then you are not caught up on current events. After gaining presidential assent on September 8, 2016, the GST is now a reality. Furthermore, it is important to plan in advance for this biggest reform since independence.
Mark my words, the GST will have an impact on every individual of the nation.
In this article, we will discuss the impact of the GST on small business and startups with a turnover up to INR 50 Lakh. The GST has proposed the concept of a composition scheme, where MSMEs and startups have to pay tax at 1%-2% on the total turnover with lesser compliances.
The concept of the composition scheme is to help small enterprises and startups to help reduce the compliance cost and to provide ease of doing business.
However, under the GST, the composition system is pretty technical and even a small mistake can cost you lakhs in a penalty.
These are the seven mistakes to avoid if you are covered under the GST:
Making Interstate Purchases/Sales
Suppose, you have a turnover of INR 40 Lakhs and pay taxes at 1% i.e. INR 40,000. You make interstate purchases of INR 1,000 from a registered supplier. Now, you cannot realise how much this purchase will cost him.
As per the law, the composition benefit will cease and the person will be liable for the standard tax rate, e.g. 20%. Now, the tax to be paid shall be:
Tax at standard rate: INR 8 Lakhs
Penalty of equivalent amount: INR 8 Lakhs
In total, it will be a minimum INR 16 Lakh, which will further increase by late fees on non-filing of returns. This will cost an assessee around INR 20 Lakhs.
So, be very proactive and take every precaution. Otherwise, it will be tough for a small business when taxes are to be paid.
Not Seeking Permission
If you want to avail the benefits of the composition scheme, i.e. lower tax rate and lesser compliance, then you should first apply for it. Also, once applied, you cannot change the process during the year. You can only choose to avail or not to avail the benefit at the beginning of the year, and after that to continue throughout the years.
Not For Casual Registration
Many times, people start their business just with local registration processes like shop and establishment, service tax and think that in the future, they can apply for the GST. As per the law, they are not mandatorily covered under the GST and hence, they are not liable for the composite scheme. So, startups looking for the easy option under the GST, this is bad news for you.
Be Careful Of Freebies
The turnover limit of the composition scheme is INR 50 Lakhs. Anything over and above INR 50 Lakhs is taxed at the standard rate. Now, let us understand this by way of example:
Suppose the total supply made during the year is INR 48 Lakhs and you also provide some goods and services for free to your family worth INR 4 Lakhs. So, as per your calculations, your sales figures will be INR 48 Lakh.
But as per government and law, it will be INR 52 Lakhs. Hence you will face the following consequences:
- You will cease to be covered under the composition scheme.
- You will be liable to pay taxes at standard rate with the penalty of equivalent taxes.
- You will be in default for non-filing the returns and levied with a maximum penalty of INR 5,000 per return.
Hence, your ignorance can be detrimental to your business.
The Reverse Charge Mechanism
Under the GST, the concept of reverse charge, i.e. opposite to regular charge, comes into play.
The basic rule under the GST is that the person who is a supplier of goods and services will be liable to pay to the government.
This is totally opposite to the regular basic rule when the government notifies some cases where the recipient of goods or services will be liable to pay taxes.
Hence, even the person covered under the composition scheme will be liable to pay taxes at the standard rate and not at a discounted composite rate of 1%. Furthermore, this will only add to their cost, as they cannot claim it as input tax credit.
Not Filing Returns On Time
Earlier, many startups or businesses either did not file their returns on time or not filed them at all. At the same time, the about it. Now there will be a complete transformation. One will have to file a return on time to avoid the late fees and fines.
There is a late fees penalty of INR 100 per day subject to a maximum of INR 5,000 per return.
Claiming Input Tax Credit
The primary condition of availing the benefit of the composition scheme is that no input credit will be available. However, this is a lesser-known fact and tends to create a problem for the business later on.
Bottom Line: This Is Not The End
Things are changing very fast, and anyone who is not responsive to it will suffer. The GST will bring about a complete transformation and hence, one should be prepared for it. In this article, we have only discussed one section about the new GST law, which promises to be very different and complex. So, don’t wait for the law to be implemented fully but do your homework and be prepared from the get-go.