Ask any start-up founder regarding the toughest challenge faced by them and chances are many of them would rate taxation any day over funding for their business. Indian businesses have been plagued with several taxes—central excise, Octroi, value-added tax (VAT), service tax and so on. All of these amalgamated into a single tax with the advent of a single Goods and Services Tax (GST) from July 1, 2017. As much as the shift has been lauded, it has also meant a change in the way one has been working.
For start-ups the change has two consequences—change their own working and also work only with those who are GST compliant and have registered for the GST. Take Shotang, the on-cloud marketplace in the business to retailer space, which sought help from EY to migrate seamlessly to the GST regime from their earlier systems. The process was tedious and it also meant that they had to help about 15,000 retailers on their platform to be GST ready. “Our representatives are still handholding our customers and putting them at ease about this major tax reform,” says, Anish Basu Roy, co-founder and CEO, Shotang.
The GST regime has strict compliance issues, which means, one who is GST registered can practically do no business with another entity that is yet to have a GST registration. The introduction of compliance ratings which tells how compliant businesses are to GST registration is indicative of how things are panning out. Like it is true for every change, there are also startups that have benefited from this new tax structure.
“The compliance rating system will help regulate business in the ambulance aggregating business. Working with a large corporate is easy, but working with extremely small business units is where the compliance ratings will play a crucial role,” says Himanshu Sharma, cofounder and head of operations, Dial4242. Being in the space of aggregating ambulances, their partners largely are ambulance fleet owners. They also have partnerships with hospitals and clinics. “As most of these have also been exempted from GST, there has only been a positive impact on the overall system,” adds Sharma.
Start-ups are also doing everything necessary to be GST compliant. Take for instance Funcart.in, an e-commerce portal for party supplies which has ensured that all goods on its platform have been tagged with the relevant Harmonised System Code (HSN) or product nomenclature system so that proper rate of GST is charged on the goods supplied. “Compliance ratings will ensure dealing with only tax compliant entities. Hence, GST compliance ratings will hold a key criterion for vendor selection,” says Ritika Nangia, founder, Funcart.in.
She has also put in place checks to ensure minimal transactions with unregistered persons to reduce compliance burden arising out of such transactions. “We do not allow non-GST registered suppliers to sell on our platform, so that retailers can trust Shotang 100 per cent on the source of supply,” adds Basu. Internally, his company was working towards being GST ready for more than a quarter to get everything in place before the momentous shift.
For Rastey Cabs, a hybrid cab service focussing on corporate, being GST ready meant a fair amount of work. “First, we had to completely change the invoice. New modified invoice bearing GST Number (GSTIN) and Service Account Number (SAN) had to be created. In place of half yearly service tax return, we have to do it monthly from now on. This has increased the account work,” says Sandeep Mishra, co-founder, Rastey Cabs.
The big factor staring at most start-ups about the GST is the input tax credit, which is the credit that manufacturers receive for paying input taxes towards inputs used in the manufacture of products. Similarly, a platform or a dealer is entitled to input tax credit if he has purchased goods for resale. All such entities are liable for output tax on taxable sales done in the process of his business. With the help of input tax credit, they can offset the output tax against the input tax already paid. Furthermore, each state has its own norms and conditions in this regard and is applicable accordingly.
Gain for organised players
For Broomberg, a cleaning services company, the GST regime has meant that organised players would have a slight edge in the market due to the input credit of the material procured. “We have been able to gain a few percentage points on our margin and this has helped us to become more competitive,” says Samrat Goyal, CEO and co-founder. Almost all start-ups are making the shift towards GST complaince. “Our work has also increased as we have to have separate GSTN for all the states where we have our operation to ensure timely deposit of GST,” adds Mishra.
But it’s not all smooth; GST has introduced the concept of reverse charge where if an unregistered dealer is selling to a registered dealer, the latter has to pay the tax which means that it makes sense to do business only with dealers registered under GST. While this move is meant to incentivise GST registration, it would mean that in the initial stages start-ups have to grapple with capital shortfall.
“GST has to be paid under the reverse charge mechanism on procurements from unregistered suppliers, although credit would be available. This would lead to a working capital blockage for us,” says Nangia. In the short run, any change impacts businesses till such time that they get settled. At the moment small businesses and start-ups are also facing the same challenge.
What matters is the upside to derive from a near seamless digital footprint with payments and taxes, which is worth all the hardship in the long run. For agile smaller companies, here is the opportunity to leapfrog on back of a tax structure, which has taken away arbitrary taxation and ambiguity, which in itself is a big upside of GST.
The upside of GST
Digital push: GST aims to make taxation transparent with all tax processes going digital, including taxpayer registration, refund claims.
Easy refunds: With the introduction of GST the refund process has not only become smooth, it has also become easy and transparent.
GST Registration: The revenue limit for registration under GST is Rs 20 lakh, which makes India an integrated economy where we can witness an upsurge in start-ups.
Credit score: Few years from now, GST will enable financial inclusion in the start-up and small enterprise economy. The digital footprint left by organisations will be inclined towards fulfilling the eligibility criteria for credit facilities.