Know more about GST for Small and Medium Businesses

01/12/2021

What is the GST?

As a first in indirect tax reform in India, the Goods and Services Tax (GST) was implemented on July 01, 2017. The GST is a new system of revenue collection that unites a host of taxes levied earlier by the Central and the State Governments. Better known as the “One nation, one tax”, the GST is levied on consumption, in contrast to the earlier levies charged on production.

GST is charged at the point of consumption or the sale of goods and not during manufacturing. The buyer has to pay a singular tax to the last in the supply chain. This enables cheaper goods to enter the market and drives economic activity for the whole economy.

GST and Small Businesses

Since implementation, more than 38 lakh taxpayers have migrated into the GST regime. By the end of 2017, a further 64 lakh taxpayers were added on as new registrations. By March 31, 2020, Deloitte states, there were 1.23 crore active GST registrations indicating an increase in tax base and change in the compliance behavior of the taxpayers. Although considerable steps had to be taken by small and medium businesses or SMEs to become GST ready, scrupulous businesses have been rewarded by tax credit inputs and there are a host of other benefits that SMEs can make use of by opting for the GST taxation system.

Advantages of GST for Small Businesses

Fostering an atmosphere of trust between taxpayer and collector:

In developed countries, the government charges a host of direct taxes that helps fund the public exchequer. This is a stark contrast to countries like India where taxes are collected indirectly when consumers purchase goods. For a small business owner, a plethora of taxes under the old regime was a deterrent to production and costly. The GST enables most of these taxes to be unified and this adds transparency to the tax paying practice.

Easier to Start a Small Business:

Another critical advantage of GST rules for small businesses has been the ease of setting up production. Under the old regime, aspiring businesses had to get a Value Added Tax (VAT) registration. However, this was not simple. Each State had a different set of processes and getting a VAT registration was very cumbersome. GST requirements for small businesses are less complicated and free of corruption. You can go to an online portal for GST registration and set up a business in a fraction of the time in comparison to the older VAT regime.

Small Businesses pay less Tax under GST:

Another big advantage of the GST regime has been that small companies pay lesser tax than they paid under the VAT. The GST eliminates the system of double taxation where small business owners paid multiple State and Central taxes. In the VAT regime, SMEs had to pay as much as 32 per cent in taxes. Under the GST system, they pay between 18 to 22 per cent only. Additionally, the GST rules for small businesses mandates owners to file a much more straightforward tax process unseen in VAT.

More Businesses are Tax Exempt:

Those businesses who earn up to Rs 10 lakhs annually do not need to file a GST return. Under VAT, small companies that made more than 5 lakhs a year had to file a tax return. Under the new GST system, small businesses are exempt for paying taxes. This exemption increases the incentive for small businesses to establish operations enabling them to grow.

Easier Compliance:

Since GST eliminates challenges and bottlenecks that occurred under the old tax regime, more small business owners want to set up shop and try their hand at entrepreneurship. With GST, you can find it easier to get your venture off the ground and potentially gain financially in the longer run.

Better Logistics:

In the VAT regime, several small and medium businesses hosted multiple warehouses across States to avoid taxes at state crossing points. These warehouses also had to operate below their capacity to avoid multiple taxes across the State and Centre. However, with GST for small businesses, the restriction on inter-state movement of goods has reduced significantly. As a result, e-commerce aggregators can now set up warehouses at convenient locations and get rid of unwarranted logistic expenses.

Getting Rid of Cascading Taxes:

In the VAT regime, the taxation system had a cascading effect with the same product being taxed at different levels of production thereby leading to higher costs and lower levels of pricing efficiency. This made small businesses uncompetitive. The biggest change in GST is the fact that it is a value-added tax that is imposed on the value-addition. Small businesses were utilizing many services for manufacturing their product and paying service tax on each of these individual services repeatedly. The GST avoids taxes at each level and enables small businesses to get the credit for the service tax paid when eventually calculating the tax liability.

Easy Availability of Business Loans:

GST has made the availability of business loans for the micro and small, medium (MSME) enterprises department easier and simpler. Those small businesses that have a GST certificate can easily meet the MSME Loan eligibility criteria after the authentication. Since there is an online portal for GST registration, small businesses can also get started with a few easy clicks when applying for loans.

One Single Common Registration Online:

In the old VAT regime, small businesses were required to register under various tax imposts individually. There were separate registrations for excise duty, VAT, sales tax and service tax. Under GST for small businesses, the disparate processes come under one umbrella and can be done online with e-verification and authentication. Existing taxpayers are automatically registered for GST payment and substantial paperwork is done away with. The paperwork and uploads can be managed online and digitally signed.

Disadvantages of GST for small businesses

Increased Operational Costs:

The GST makes it imperative for small businesses to update their old accounting to GST-compliant software or ERP that help keep businesses running. Nonetheless, the cost of purchase and the installation of software alongside the training of employees on how to use these operational tools can be high. Small businesses do not have the financial means to hire tax professionals to become GST-compliant.

Higher tax Burden:

In the VAT regime, only those businesses that had an annual turnover of more than Rs 1.5 crore had to pay excise duty. With GST requirements for small business, those that have an annual turnover of Rs. 40 lakh must pay tax.

selling online representation of online store

Digital Record Keeping and E-governance:

The entire process of registering with the regulatory authority and issuing GST-compliant invoices, maintaining digital records, and filing returns can be a burden on SMEs. E-governance can also be a challenge to implement as transitioning from paperwork to online may be disadvantageous for some in the short term, as most lack the expertise.

How to Register for GST Online for Small Business Owners?

Registering for your GST payments is easy and requires no paperwork. It usually takes 2 to 6 working days and is mandatory for those earning more than Rs 40 lakhs. For the Northeastern states, the mandatory turnover limit for small businesses is Rs 10 lakhs. You can go to the single online GSTN platform for GST related queries that is common for the entire country. You can track the GST payments via the e-way bill portal with e invoicing and a real-time, reporting-based GST returns platform.

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