How GST impacts startups
- Feb 8, 2018 | Vatsal Bhandari
India has been at the vanguard of a burgeoning startup scene, catapulting companies like Flipkart, Ola, and Paytm to unicorn status, i.e., a startup valued at $1 billion or more. Acting as an engine for innovation and employment, startups also play a critical role in bringing unorganized sectors into the fold of organized sectors.
Today, India ranks third among the world’s nations with the most startups, with an estimated 4,200+. And that number is only expected to grow, potentially crossing the 10,000 mark by 2020.
While the Goods and Services Tax (GST) is expected to facilitate that growth, not all aspects of the new tax regime are startup-friendly. Let’s weigh the positives against the negatives.
- Improved logistics
GST has, figuratively, done away with state borders when it comes to moving goods. The introduction of the e-way bill from 1 February onwards is expected to act as a catalyst for even smoother movement of goods between states. The e-way bill will mainly benefit startups involved in perishable products as well as ecommerce marketplaces by ensuring timely deliveries as well as quick returns of goods. In a similar tone, efficiencies in the movement of goods will open avenues for startups to foray into logistics, ushering in technological innovations for the segment.
- Simplified taxes
GST consumed multiple indirect tax levies across states, ensuring startups do not have to bear with confusing VAT laws in each state, as was the case pre-GST. This reduces tax compliance burdens and optimizes resources. Likewise, filing returns and paying GST exclusively online minimizes legwork for startups.
- Easier compliance
Startups also benefit under the composition scheme. Any business with an annual turnover of less than Rs. 1.5 crore can opt for the composition scheme. Instead of filing multiple returns every month, they pay a flat rate of tax on their annual turnover — either 1 or 5 percent, depending on the nature of the business. This scheme allows startups and small businesses to focus on managing and expanding operations rather than on the tedious process of tax compliance.
- Restrictive composition levy
On the flip side, any business subscribing to the composition scheme cannot avail the benefit of input tax credit (ITC) or make any interstate supply of goods. This severely limits the benefits that GST bestows upon fledgling startups opting for the composition scheme. They also cannot sell merchandise through e-marketplaces, since GST mandates ecommerce to collect tax deducted at source (TDS). So while the composition scheme dramatically reduces the compliance burden for startups, it also acts as a deterrent to expansion in some respects — a double-edged sword, per se.
- Transparent ratings
GST implemented a compliance score rating mechanism whereby prospective buyers gage the credibility of a business by its compliance score. This, in turn, compels businesses to do everything possible to possess a ‘good’ rating. Also, tax authorities determine the speed of refunds on the basis of compliance scores. So even startups with limited resources have plenty of incentive to get tax compliance right or face potential reputation damage and delayed refunds.
- Financial inclusion
Financial inclusion is long-term in nature, revolving around the large cache of data that will be generated by GST. Such information might be beneficial in two ways: (i) Future startups will have access to data that determines the criteria of whether their tax conformity is at par and their compliance rating is high, thereby ensuring transparent, authentic, and relevant data to attract investors. (ii) Similarly, FinTech organizations and venture capitalists will have access to data about the operations of young and promising ventures before partnering with them.
GST is a pivotal reform, not only for startups, but major corporations as well. The implementation of GST ensures that startups have an easier experience with tax compliance than under the previous regime, and that they enjoy additional benefits, such as smoother movement of goods. Both of these benefits free up tight budgets for operations and performance of services.
GST, coupled with other various government policies, will usher in a new wave of homegrown startups and better position them for success. All in all, GST, even with its specific challenges, is a hugely promising move for the startup scene in India.
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