Impact of GST on Startups in India

August 10, 2017, Posted By : Team Yomillio

At the stroke of midnight, 1st of July 2017, India became one single market where there were no constrictive regulatory norms, where there is seamless movement of goods across the country in reduced time, and where many of the VAT regime challenges were obsolete.

Although we are at a very initial stage of GST implementation, the impact of GST on startups seems to be quite favourable so far. GST’s uniform policies and exemptions are sure to help reduce the startup tax burden, logistics and inventory cost, and thus pave the way for a positive impact on sales and profitability.

Listed below are some of the benefits of GST implementation, accruing to businesses as a whole and for startups in particular.

  • Simplified online procedures from registration, the filing of returns to tax payments.
  • Simpler and uncomplicated taxation puts less stress on your resources.  
  • The threshold for GST registration is Rs.20 lakhs annual Turnover, unlike the Rs.5 Lakhs under the VAT regime.
  • Startups in service industries can set off their service tax paid on purchases against the service tax on sales.
  • Easier and simpler inter-state movement of goods.
  • Reduction in logistics cost as GST does away with the concept of having warehouses across states to eliminate entry tax and Central Sales Tax.

But the impact can’t be said to have a uniform impact across all sectors. For instance, manufacturing startups are not taking it so well. Under the erstwhile Excise laws, excise duty threshold was Rs.1.50 crores compared to the Rs.20 lakhs eligible now under the GST, thus increasing the tax burden of many manufacturing startups.

Limiting to one article the impact analysis of all the known startup sectors won’t be doing justice to such a revolutionary Tax reform. Hence, I have zeroed in on one of the top notch sectors for the purpose; the E-Commerce sector, the sector which is in the forefront of the startup boom in the country. And why because…

  • India is second largest E-Commerce market in the world. ETRetail.com
  • According to a study conducted by Internet and Mobile Association of India, e-commerce is estimated to have crossed, by the Dec 2016 end,  Rs.211,000 crores and well on the way to breach the $ 100 billion mark by 2020. ClearTax.

Impact of GST on E-Commerce Sector:

Head. Under VAT Regime. Under GST Regime. Impact.
Threshold. Threshold of Rs.20 Lakh for GST Registration. No Threshold applicable. All e-commerce businesses are required to get registered under GST.
  • Tax burden irrespective of Turnover.
  • Every seller needs to be registered and unregistered sellers would be weeded out of e-commerce platform.
Registration in Individual State. NA Businesses are required to register in each & every state in which supplies are made. Since, as per the GST business model, Sellers are expected to supply to all the states, they are liable to obtain registration in every state.
Stock-Transfer. Stock-Transfer was not attracting VAT/CST. Stock-Transfer would be taxed.
  • The shift of base from “sales” to “supplies” for taxation would impact Micro, Small & Medium Enterprises.
  • As supply without consideration also would be taxed, free samples & promotional materials will increase the promotional expenses of e-commerce operators.
Inventory Spend. Cascading Taxes. Standardised Tax that has replaced 17 indirect taxes. Free movement of goods facilitates redeploying the earlier lost inventory spend on productive value creation.
GST Composition Scheme Small and Medium scale businesses with an annual turnover of fewer than Rs.75 Lakhs dealing exclusively in goods and in Restaurant sector are eligible for benefits under the GST Composition scheme. Excluded to be registered under this scheme. Quarterly filing of Returns instead of monthly Returns and nominal Tax rates of 2%, 5% or 1% is out of reach of E-Commerce.
Tax Collected at Source. (TCS) NA Marketplace operators are required to deduct 2% as GST liability of sellers and deposit the same with the Government.
  • Will lock-up the capital for 20-50 days and affect the liquidity and cash-flow of the sellers.
  • Order cancellation & Goods returned will make refund seeking a complex process.
Standard Pricing. Benefit of Tax arbitrage was available. Standard tax rate for each product. The standard rate of tax removes the tax arbitrage benefits and brings e-tailers and offline sellers to par in terms of costing and pricing.

Conclusion: Though Industry experts have welcomed the standardisation and simplification promised by GST, TCS is their main cause of worry. It is felt that TCS will deter sellers from coming on board an E-Commerce platform.

It is too early to come to a conclusion. We will have to wait and see how profound the impact is going to be, how businesses are going to react. It all depends on whether the Government will consider and address the concerns voiced by E-Commerce players.

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