The great Indian Start up Boom under GST

GST, the largest indirect regime overhaul India has ever seen will definitely prove beneficial for the Indian Start up sector.  Let us tell you the reasons why:

·       Higher limit for Registration: While in erstwhile tax regime, businesses that made a turnover of INR 10 lakhs per year had to register under the home state tax laws. For a service provider, this limit was set at INR 9 lakhs. The GST Council however, has chosen to set the limit for registration at INR 20 lakhs.

This means, smaller businesses that do not breach the threshold limit do not have to get registered under GST. This will result in saving of time and cost due to increased compliance burden GST.

·       Introduction of a ‘DIY’ compliance model: Startups love DIY(Do it yourself), whether it is writing code or filing tax. GST aims to make taxation transparent and with all tax processes going digital, new start-ups can rest easy. From taxpayer registration, return submission, to tax payments and refund claims, startups can file details online. This is in line with Govt’s Digital India scheme.

·       Free flow of goods and services: According to a research, a truck carrying goods in India covers an average of 250-400 kms a day, as compared to 700-800 kms in European countries. Much of this is due to the long wait at check points.

Under GST, this scenario will change with the introduction of E-way bill. One can hope that it will improve logistics and improve the speed of goods transport.

·       Tax credit on purchases: This is the most important and benefitting part of GST. Now start up’s will get input tax credit for the purchases and this can be set off against their output tax liability. I know the many of you won’t get this part. Don’t worry, I’ll explain you with an example –

Under earlier laws, suppose a company buys office supplies worth Rs 20,000 paying 5% VAT.

It charges 15% service tax on services of Rs. 50,000.

Their output tax liability is Rs 7,500(50,000*15%) and they do not get any credit of VAT paid on office supplies.

But under GST, assuming 18% on purchase as well as sales, the calculation will be –

       GST on service @ 18% -                                               9,000

       Less : GST on office supplies(20,000*18%)             3,600

       Net GST payable                                                          5,400

·       High liquidity: Many startups face the problem of having their capital stuck in tax refunds. But with GST making the processes easier and faster, startups can file for tax refunds online and hope to get their money on time. Hence, high liquidity.

It is important to note that the threshold limit of 20 lakhs (for registration) does not apply to startups in the e-com sector.

Startups in the manufacturing sector may have a hard time, too, as under the existing excise laws, only those manufacturers with a turnover more than INR 1.50 crore have to pay excise. However, with the implementation of GST, the turnover limit has been reduced to INR 20 lakhs thus increasing the tax burden for many manufacturing startups.

Despite this, experts and industry analysts are hopeful that the benefits of GST will outweigh its cons, and it will prove to be a lucky charm for Indian startups.