The implementation of the Goods and Services Tax (GST) after a decade-long deadlock is a welcome step for Indian small and medium-sized businesses (SMEs). India's approximately 51 million SMEs are critical to the country's economy, accounting for 45 percent of GDP and employing 450 million people. GST heralds a simpler and more seamless system that promises to consolidate various existing indirect taxes, so resolving the long-standing issue of multiple indirect taxes.
After a decade of debate, the Goods and Services Tax (GST) was approved in 2017. Since then, the GST has increased both India's ease of doing business index and government revenue from small and medium-sized businesses. The GST has also benefited SMEs by facilitating a streamlined tax framework for the country's 51 million or more small business owners. The GST's primary goal is to consolidate different indirect taxes and decrease the paperwork that affects all types of commerce.
GST has simplified the establishment of SMEs and MSMEs by drastically reducing procedural fees and compliance expenses with the overall indirect taxes regime. A unified tax system across states will ensure proper transfer of tax credits regardless of the actual locations of the buyer and seller.
So, what has changed after the implementation of GST in India?
The GST collects all indirect taxes in a fair and transparent manner across the value chain. Previously, the Indian government taxed commodities and services separately. The central government would levy a tax on manufacturing, while the states would levy a tax on sales. The entire system required numerous layers of taxation and a significant amount of paperwork to be filed and confirmed. This not only made the entire procedure time-consuming and inefficient, but it also permitted tax evaders to exploit flaws in the system.
Furthermore, the application of this extremely intricate taxing scheme frequently perplexed even government administrators. This could occasionally result in an unjustified or double taxation of end users. With the implementation of GST, all of this confusion has been reduced to a single-point taxation for each category of goods and services.
How has the GST helped SMEs and entrepreneurs?
The Indian SME sector is said to as the "backbone" of the Indian economy. SMEs employ nearly 450 million people and account for 45 percent of India's GDP. While initial assessments of the GST implementation were cautious in terms of cause and effect, the picture has changed dramatically. Here's how GST has helped SMEs and startups thrive.
Reduced Tax Burden: The most evident effect of GST has been the reduction of a slew of indirect taxes such as Service Tax, Entertainment Tax, Excise, Surcharge, Octroi, and so on. Before the GST, for example, a small business with a turnover of more than Rs. 5 lakhs had to pay a lot of taxes at numerous points throughout the supply chain. SMEs with a turnover of less than Rs. 20 lakhs are now exempt from GST. This, in turn, has helped the expansion of India's small and medium-sized businesses.
Market Unification: The GST has made it easier for SMEs to grow their consumer base. Previously, the CST was levied on interstate transactions, raising the cost of locally created items sold in neighbouring states. So, if a brassware company in Western Uttar Pradesh wanted to expand into Madhya Pradesh or Bengal, he would have to compete on price rather than product quality. The 'one nation, one tax' structure of GST has addressed issue. A small business owner can now buy and sell raw materials and completed goods in India without worrying about VAT or pricing.
Reduced Logistical Costs: GST has not only simplified the manufacturing and sales processes, but it has also had a significant positive impact on the country's logistics. The elimination of several entrance taxes has resulted in a significant reduction in travelling time. The serpentine lines we saw at interstate toll booths are now a thing of the past. This, in turn, saves money for both carriers and producers. Manufacturing has also had a domino effect. As items move faster, they sell faster, increasing demand for new stock and stimulating manufacture.
Enhanced Compliance: The simplicity of taxation and regulatory procedures associated with GST has also contributed to increased tax compliance in India. Small and medium-sized enterprises (SMEs) have taken to the new system like fish to water since it helps them legitimise their businesses and earn benefits like as access to new markets, increased sales and revenues, improved credit ratings, and access to small business loans. Furthermore, the digitization of the taxing system has eliminated the need for human intervention, which was a major disadvantage of the prior system. Registration, payments, refunds, and returns have all been handled online, ensuring automated delivery of GST certificates. This has improved system transparency and reduced instances of bureaucratic harassment.
Made it easier to start new businesses: GST has also boosted the growth of startups and new enterprises in India by eliminating several types of VAT registrations and differing taxes rules between states. GST ensures quick execution and reduces startup costs by centralising the entire system. Small business owners can now use more of their money for startup and expansion rather of paying unneeded taxes and fees.
SME finance has been boosted: The underlying consequence of GST has been an increase in financial activity by small and medium-sized businesses as they open up to new markets and expansion opportunities. This has resulted in a greater acceptance of alternative financing choices from FinTech lenders in India who provide tailored business credit to SMEs. In turn, NBFCs have digitized their services in parallel with GST, allowing consumers to apply for small business loans online, submit papers, receive approvals, and disburse funds all through electronic channels. For SMEs, online business loans have also decreased interest rates, processing fees, and prepayment penalties.
Positive impacts of GST on SMEs:
1. It is now easy to start a new business
Previously, if your company had operations in many states, you had to register for VAT with each state's sales tax authority in order to conduct business in that state. Because each state had distinct tax standards, the entire process was cumbersome, and business owners had to pay various procedural costs for VAT registration. The registration is centralized under GST, and the rules are identical across the country. To receive a GSTIN, simply fill out and submit an online form (GST Identification Number). Under the GST regime, starting a new firm and then growing it will be a lot easier.
2. The entire taxes process is simplified
The primary rationale for implementing GST is to eliminate cascading taxation. Because it levies a uniform tax on products and services across India, it avoids the complexities generated by the overlap between Central taxes (Excise duty, customs duty, service tax, etc.) and State taxes (VAT, purchase tax, luxury tax, etc.). VAT, purchase tax, and luxury tax on goods and services will now be unified into a single tax with a single return. If you've been spending a lot of time managing different taxes, you can relax now that the GSTN site makes filing and paying taxes easier.
Dealing with fewer tax authorities is also easier with an unified tax. Previously, business owners had to deal with a variety of tax authorities based on the nature of their operations and transactions. You may be certain that the responsible authority under GST is always either the Centre or the State government.
3. Lower logistics costs
The current tax framework has caused numerous problems for the transportation industry. Long lines at checkpoints and interstate entrance points have forced vehicles to sit idle for extended periods of time, increasing labour and fuel costs. Businesses delivering goods to neighbouring states have struggled to file paperwork and pay entrance taxes at interstate borders, further delaying goods delivery.
The present Central Sales Tax (CST) on interstate sales will be replaced by IGST, a combination tax comprising of CGST and SGST and collected by the Central Government. Because the absence of border and check-point taxes under the GST regime makes state borders less significant, both the delay and the transportation cost will be decreased. This will boost interstate commerce, speed up the movement of commodities, and lower maintenance costs.
4. There will be no distinction between commodities and services
Businesses that provided both goods and services formerly had to calculate the VAT and service taxes separately. GST simplifies the procedure by erasing the distinction between commodities and services; tax will be calculated on the whole amount rather than specific products or services. This will assist SMEs in taking advantage of tax breaks for purchasing input products and services (like import, interstate and local purchases, and telephone services).
Currently, each invoice includes a lengthy and perplexing list of taxes levied on the goods and services involved in the transaction. GST will simplify invoicing by requiring only one tax rate to be specified.
5. Raised thresholds for new businesses
Businesses with a moderate yearly revenue (Rs.5 lakh in some states and Rs.10 lakh in others) are required to register for and pay VAT under the current regime. Many firms are relieved of this burden under GST because they are not required to register or pay if their yearly turnover is less than Rs.20 lakh (Rs.10 lakh in North Eastern states). Furthermore, firms having a turnover of Rs.20-Rs.50 lakh will pay GST at a lesser rate under the composition system. This should benefit startups and other small enterprises by easing them of tax responsibilities.
Concluding Thoughts
The GST is only one step toward the market reforms that the Indian economy need. However, the Indian government's response following the implementation of GST speaks volumes about its commitment to reorganizing the financial system. The review committee has made both minor and large improvements to the GST filing and implementation procedure, and more are expected as the system matures. For the time being, the GST has transformed the way the Indian SME industry operates, establishing it as a decisive turning point in the country's growth story.
Overall, GST simplifies the overall tax filing and payment process. By unifying the Indian market, it has also increased rivalry among SMEs. You may mitigate the possible negative consequences of the new regime on your organization if you are proactive and take care of your GST compliance steps ahead of time. In the long run, GST is likely to benefit SMEs and the Indian economy as a whole.
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