Who is afraid of GST?

Deskera
Updated: Jan 18, 2017 03:08:48 PM UTC
gst_sm
Photo: Rupak De Chowdhuri / Reuters

Since the announcement that the Goods and Services Tax (GST) is likely to come into effect from July 2017, businesses have been scurrying for cover and are particularly worried about the sweeping nature of reforms that the GST seeks to bring in. Startups and SMEs are naturally concerned as they usually don’t have the financial wherewithal to deal with such large-scale changes. India has, of late, seen a boom in the startup culture, especially in the IT industry.

A Nasscom report recently found that India has 3,100 startups, the fourth highest internationally. The numbers could go up to as many as 11,500 by 2020. A majority of such startups (85 percent) fail to flourish due to several reasons such as lack of funds, institutional support, etc. If enough awareness is not created about the GST and if implementation is with glitches, it could spell doom for the startup environment that is just taking off.

GST will completely overhaul the taxation system The new tax law will bring radical changes in the manufacture, sales as well as consumption of goods and services in India. It will replace different taxes the Centre and state governments levy separately. The tax will be collected at each stage and computed using the input tax credit method, according to which taxes paid on the purchase of goods and services in other states could be claimed. This would allow GST-registered enterprises to cut costs as they would be able to claim their out-of-the-state expenditure during the usual course of commercial activity.

“For instance, if I purchase product A in some other state, the duties that I pay there consist of taxes which eventually get added to costs since I cannot claim that tax credit in my home state. Some enterprises may be tempted to evade the system and purchase goods without documentation. But if I am a GST-registered enterprise, I can claim tax credit proportionate to the GST,” said Shashank Dixit, CEO, Deskera, a global leader in cloud technology.

Moreover, GST does not discriminate between goods and services and would tax both at a single flat rate. This provision removes the multiplicity of taxes and concomitant hassles in computing them, leading to better collections and improved participation in tax net. With businesses saving on overall taxes and removal of complexities, enterprises are poised to gain from the development. Additionally, the step could de-incentivise tax evasion for businesses and enterprises and streamline supply chains.

GST will save startups and enterprises from double taxation
The GST would in all likelihood rid enterprises and startups of cascading or double taxation that they most frequently encounter and would enable a comprehensive and integrated national market as a seamless whole.

Currently, big corporate houses tend to “stock transfer” goods to other regions and states since they possess the required infrastructure and logistics. Thus, they are able to avoid paying tax on interstate movement. However, startups, SMEs, and small enterprises lack that infrastructure and are unable to do the above. On the other hand, they purchase goods through interstate sales (rather than stock transfers) and have to shell out central sales tax. In this respect, what the GST has done is to bring startups and SMEs level with big corporate houses by levying taxes on stock transfers as well.

A single tax has other advantages too. After the plethora of central and state taxes get subsumed, the overall cost of ensuring tax compliance for enterprises would go down substantially. Over time, central sales taxes too could get phased out. Moreover, taxation has always been a bone of contention between the Centre and states, leading to intermittent turf wars, sometimes precipitating into slow transit times, red tape and general vitiation of the business climate.

In conclusion
Generally, the tiniest change in tax chain has the potential to result in a domino effect, influencing the complete structure. Moreover, GST is a paradigmatic shift, so it will affect everybody. Businesses would do well to be GST-ready.

Looking at the big picture, GST may prove to be path-breaking in streamlining Indian taxes and removing random exemptions, a big source of black money. The new law should improve efficiency and competitiveness among startups and enterprises, at the same time watering down the escalating effect of the current regime. In the long run, GST could reduce tax-compliance cost of the government too and de-incentivise the prevalence of black money, thus ensuring greater economic growth.

- By Muqbil Ahmar, Technology Evangelist

The thoughts and opinions shared here are of the author.

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