A GST breakdown

If you’re in India and not living under a rock, it’s safe to say you’ve probably heard about GST by now. What is GST? Why are these three magical letters being talked about so much these days? Well for starters, the Goods and Services Tax (GST) bill has been heralded as the most significant tax reform ever passed and is seen as a game-changer for the Indian economy. Its intended purpose is to bring India under one tax umbrella and unify all 29 states into one market.

GST is an indirect tax that will subsume most of the existing indirect taxes such as VAT, Service Tax, Countervailing Duties and other Cesses and Surcharges. It is essentially a destination based tax that is levied where value is added at each stage of the consumption cycle for goods and services.

The main aim behind GST is to reduce the various inefficiencies of the previous tax regime. This includes the removal of multiple hidden and embedded taxes, and now for the first time, the consumer will have a clear idea of the total central and state taxes levied on a product/service.

Now will this be the one tax to rule them all? Not quite. India will be adopting the dual system followed in Brazil and Canada whereby GST is split into two equal components: CGST (Central Goods and Services Tax) and SGST (State Goods and Services Tax). These two tax components are applicable for any sales that happen within respective states. For sales or transactions happening across states, Inter-State GST (IGST) would apply.

Here’s a split of taxes that were applicable in the previous regime that now get subsumed under both components:

Unlike the range of tax rates that existed previously, there is a simpler 5 slab structure for GST:

While these are some of the broad categories, here’s a far more exhaustive list.

GST Effects

The adoption of GST is touted to bring about many benefits such as:

  • The avoidance of double taxation issues as earlier VAT was under State jurisdiction and Service Tax was applied under the Centre’s directive.
  • Bringing about a level and transparent playing field
  • A simpler, more efficient collection system with the reduced need to interact with different state, central and local bodies.
  • An increased ease of doing business as there are comparatively less registrations and tax compliances to keep track of
  • Reduced tax burden – With GST in place, tax credits can be claimed for raw materials or input purchases and set off against any sales taxes paid, regardless of it being for goods or services, thereby reducing the overall tax burden on the business.

When considering the economic impacts of the move, the attempt to streamline the entire indirect tax regime will result in a short to mid-term upheaval for most businesses. Additionally, there is a business requirement of having GST compliant invoices which must also be uploaded for tax return purposes. This means companies will have to reorganise and revamp established systems and ERP software to integrate GST. It would also bring smaller, unorganised companies under the tax net and encourage efficient bookkeeping as well as keeping a consistent and transparent paper trail. Most SME’s will not be GST literate and will require the assistance of tax professionals to ensure they’re successfully implementing GST. This would lead to a short-term rise in costs.

A significant provision of the GST bill that promises to change the way business is conducted in the country is the establishment of the National Anti-Profiteering Authority (NAPA). This regulatory body will be set up to ensure that businesses pass on the benefits of input tax credits received or a reduction in tax rates to the final consumer. Through this provision, profiteering by not passing on tax benefits becomes unlawful and consumers have the right to take action if this happens. If found guilty, traders and businesses are at risk of their business registration being cancelled. This protection of consumer interests should also encourage a better overall tax compliance within the system.

The Startup Impact

GST can be seen as a huge push to make the ‘Digital India’ dream a reality, as everything from registration, return filings and compliance aspects are all completely digitised and web-based. There will be initial teething troubles as with any new reform, however, this push to unify markets and enable the free flow of goods and services could potentially lead to a much-needed development of the hugely underserved tier 2 and tier 3 markets. Becoming GST compliant could pave the way forward to improving the general and technological infrastructure of those markets which would be the shot in the arm that’s needed for the economy in the coming years. And this would represent a massive opportunity for startups.

There is also a good deal of respite for early-stage ventures as the registration limit has now been increased from 10 lakhs to 20 lakhs (10 lakhs for the North-Eastern States, where it was previously 5 lakhs). However, this is going to adversely affect manufacturing SME’s as the earlier excise tax limit was placed at 1.5 Cr. This means a huge number of smaller manufacturing firms will now fall within the new tax limit.

For startups with a pan-India operation or considering expansion plans, GST could be a huge boon as there will now no longer be a need to navigate the plethora of State VAT laws that were a major barrier to entry for smaller players. Business expansion proposes to be a seamless process as only one licence will be needed. However, in the case of e-commerce operators and aggregator platforms, the ease of business has potentially decreased and rules have perhaps become more cumbersome. This is because they state that e-commerce operators and aggregators must now levy and deposit TCS (Tax Collected at Source) of 1% on each transaction before making any payments to sellers/traders. This will be applicable for every dealer/trader selling online goods on such platforms and according to the rules, this means each seller is obligated to register for GST regardless of whether they fall below the tax limit. This could potentially make e-commerce a more expensive proposition in the post-GST world and hinder its growth.

With the possibility of free movement of goods and services, startups can now set up inventory and warehouse centres at zones that afford them a strategic cost or time-saving competitive advantage. Logistics and transport are sectors that stand to gain a great deal from GST due to this.

As mentioned, the short-term cost of implementing GST may be expensive but in the long-term the cost of tax compliance will be reduced as companies will no longer need an army of tax experts to tackle issues.

The next few months will be a turbulent ride for the majority of the economy as it slowly comes to grips with GST. The government seems to be cognisant of this and has eased the return filing deadlines for the first two months to allow businesses to settle into the new regime.

What are your thoughts on GST? Is it the game-changer the country needs? I’m keen to hear what you think in the comments below.

Varun Raja

Varun Raja

Varun is a cofounder at 21Dojo. Armed with an ACCA qualification and a BSc in Applied Accounting, he comes with a strong background in finance and accounting and a keen interest in the running of sustainable, financially stable companies. Varun’s career found its roots in the corporate audit teams of both Ernst & Young and Deloitte, where he gained deep experience in multiple industries such as automobile, mining, manufacturing, retail, IT and banking. He later joined Arvind as a Partner in Synacrity, a startup-focused management consultancy that helped early-stage businesses with both debt and equity fundraising. This gave him the opportunity to jump headfirst into the Indian startup ecosystem, and after interacting with many passionate and brilliant startup founders and learning about their challenges, an obsessive need to contribute towards positive change was born in him. Thus, 21Dojo was born and there’s been no looking back ever since.

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