July 1, 2017 would go down as one of the most important dates in the annals of independent India’s history. The rollout of Goods & Services Tax after three decades of effort will surely pave the way for a stronger economy in the coming years.
As a startup founder, I can just think of two other dates that are as important in our history as this one. First – August 15, 1947 when Nehru’s ‘Tryst with Destiny‘ marked our beginning as a free nation and second – July 24, 1991 when Manmohan Singh as Finance Minister delivered the most historic budget and ushered in the era of LGP (Liberalization, Globalization and Privatization) sowing the seeds of a vibrant economy which currently is the 7th largest in the world and is expected to become the 3rd largest by 2030.
Technically GST turns the country into a Single Market (believe me we have been a union of markets so far with little difference from international trade), one of the largest in the world. While experts are already terming it as the biggest tax reform in the country’s history, it is shrouded in mystery. Most businesses especially smaller ones have little information (and tonnes of misinformation) about this tax reform. Given that many small businesses don’t care to pay required taxes (tax evasion is considered a sign of smartness in India) there is a mirage in front of the large business community. But how does it impact startups like mine? Should I be happy or feel let down by GST rollout? Like most other legislations in India (financial or legal) there is a lot of confusion. Experts on TV studios use technical jargons that often sound alien language to the masses.
So, I did burn a lot of midnight oil to understand the impact of GST on startups. And what did I find? Well, there are enough reasons to cheer for startups while there are a few areas where we have unprecedented challenges on our hands. To make it easier for you to figure out the impact of GST let’s take a look at the positives and negatives below.
Getting Started Made Easy – Prior to July 1, startups needed to have a VAT registration from the Sales Tax Department in their concerned states. This registration was anything but simple, ask me!
A business operating from multiple states would have to reinvent the wheel each time. GST does away with this completely and allows centralised registration of businesses. While the current registration process is giving trouble to many businesses given the volumes that are being catered to daily, in near future starting a new business would be much easier compared to what people like me had to go through.
Lowers Taxes – In the previous tax system VAT registration was mandatory for any business with a turnover of 5 Lakhs and above. Personally, I feel that was quite troublesome for startups (not for their refusal to pay taxes but the entire process of getting a VAT registration).
GST doubles that exemption limit to 10 Lakhs much to the relief of startups. While this may not seem much of a benefit, the new tax law will offer higher exemptions to businesses with a turnover between 10 and 50 Lakhs which is something I am personally cheering.
Lower Logistic Costs – Logistics eat away a big chunk of profit for any startup that is dependent on the logistic industry. eCommerce immediately comes to my mind. I have known people in the eCommerce business often talk about the high input cost in shipping items to far away locations where logistic service providers have a thin presence. In the case of small orders, they charge shipping on the customers which often turns many away.
With GST, interstate transportation of goods is expected to come down and it will also lead to these service providers increasing their presence in the hinterland. Thus eCommerce industries are expected to gain from this and become more competitive.
No Distinction between Goods and Services – One of the biggest shortcomings of the previous tax system was the fact that products and services were graded differently. So a startup that was offering both product and service has to calculate both VAT as well as service tax often making the final invoice appear too costly for the end customer. This is now replaced by one single tax which would sound fair to the customers.
Tax Credit on Purchases – From furniture to IT systems any startup spends huge sums of money in purchasing office supplies. Till now they would pay VAT on such purchases and further service tax for the services they offer their customers with no exemption benefits. GST will allow businesses to claim a tax credit for their purchases.
For example, if I purchase a laptop for Rs. 50000, I will pay another Rs 9000 as taxes. When I offer Rs 2000000 worth of service, I would pay Rs 36000 taxes @18% tax rate. Under GST I can claim that Rs 9000 as an exemption and lower my tax liability to Rs 27000.
Capital Blockage – This is one area where every startup will feel the pinch. The new tax law makes it mandatory for businesses that have GST registration to block a part of their working capital with the tax department in the form of electronic credit ledger. In a market where most startups are operating on wafer-thin working capital and finding it tough to raise funds, this will pose an enormous challenge. My own startup gets affected due to this change.
Equal Treatment for SMEs – Startups in the manufacturing sector have reasons to feel little disappointed with GST. Up until now, manufacturers with annual turnover less than 1.5 Crores were exempted from paying taxes which meant that startups with low turnover were shielded from intense competition to a certain extent. With GST this has been brought down to 25 Lakhs. This will mean that a small startup will be in the same tax bracket as an SME which signals bigger challenges for them.
So what is my take GST’s impact on startups? It’s a mixed bag as you would expect any tax reform would be. For manufacturing startups, the new tax law isn’t something they would wholeheartedly welcome as it can increase their tax liability and also put them in a disadvantageous position against the SMEs. But for service-based startups such as mine, it offers a bundle of joys. If I look at it from a larger point of view it does iron out some of the major challenges that we as a community have faced in the last few years as the existing tax laws weren’t conceived keeping in mind the needs of a technology-driven industry. Yes, there are bones of contention for the startup sector with GST but many of them would resolve by themselves in the coming time and create more business opportunities businesses like mine and cut a bit of red take that undermined the growth of startups.