The Goods and Services Bill will be implemented from midnight today and will influence many industries from entertainment to corporations. The startup ecosystem will also be affected by this economic integration of the Indian economy. The biggest indirect tax reform in India since 1947 is expected to consolidate and streamline the process of indirect taxation in an attempt to make it easier and more effective.
Before the implementation of one of the biggest changes brought by the Modi Government let’s take a look at how this reform will shape the startup ecosystem.
1. Increased threshold for registration
As per the soon to be former tax laws, any business that makes a turnover of more than 5 Lakhs has to get Value Added Tax (VAT) registration and pay VAT. Similarly, any business with a turnover of more than 10 Lakhs is required to register with the state tax authorities and obtain a tax identification number. Under the new regime, the limits for registration will be raised to Rs. 10 Lakhs and Rs. 20 Lakhs respectively. Therefore startups at a nascent stage need not worry about registration and can concentrate on growth.
2. Level Taxation field
Under this new tax rule, like small and medium business enterprises, corporates will also be paying taxes on interstate transfer and movement. The GST bill will tax stock transfers as well thereby bringing parity between big corporate players and small companies. The turf war between the Centre and states due to differential tax regime will also be reduced since the GST Tax reform will reduce the multiplicity of taxes, thereby bringing down compliance costs. E commerce and online startups active in multiple states will face no complication in the movement of goods between states, as the GST is applicable all over India, all differential treatments and confusing compliance regimes will be removed.
3. Tax Credit and Simpler Taxation
Startups in the service industry need to pay service tax under the current tax laws. But the implementation of the GST will allow startups paying the service tax to set off the VAT paid on purchases with the service tax on their sales. This reform will offer a boon to service industry providing services as costs will be reduced and thereby increasing working capital to the already overburdened startup. Furthermore, startups dealing with both goods and services will have to pay one GST Tax instead of both VAT and service tax. The GST will also encompass the various tax compliances under Excise, VAT, CST, Service Tax etc., reducing the time spent on tax compliances.
4. Limitations
While the GST bill would reform the startup sector tremendously, it is also important to note the limitations and disadvantages that will come with the bill. For starters, e-commerce sector startups will not be able to avail the increased registration threshold. Manufacturing units will face the brunt end of the stick under the new laws. Any manufacturing unit with a turnover less than Rs. 1.50 crores were exempt from paying taxes in accordance with the current laws. However, according to estimates, the exemption limit can be brought down to Rs. 25 lakhs under the new rules, bringing a large number of SMEs under the tax net.
A lot can be speculated over the impending implementation of the biggest tax reform. One thing that can be assured is that taxation in India will be changed completely. To avoid further confusion, the Government of India has asked restaurants and business to close shop before midnight.
