Implemented from 1st July 2017, the Goods and Services Tax is considered the greatest tax reform in India. The several GST council meetings since then have introduced various tax rate cuts and revisions of exemption limit, with the aim to help businesses benefit better.
Consequently, the increasing number of commercial organisations registering under this tax system is reflected in the all-time high gross GST revenue of Rs.1,41,384 crore collected in April 2021. If you are a small business owner unaware of what is GST and its benefits, here is a brief overview.
- Simplification of indirect tax system
Previously, businesses had to bear multiple taxes like Purchase tax, Central Excise Duty, Central Sales tax, Countervailing Duty, Luxury tax, Entry tax, etc., besides VAT and Service tax. This led to what is called the “tax on tax” effect or cascading tax effect. The primary goal of implementing the Goods and Service Tax was to merge these numerous indirect taxes into one. Plus, the VAT rates varied across states, which caused significant complications. All of these problems are solved with standard GST rates, which remain fixed for specified services and products, under 2 categories – CGST and SGST.
- Introduction of Input Tax Credit (ITC)
One of the most significant advantages of GST for businesses comes in the form of Input Tax Credit or ITC. In this process, entrepreneurs buy raw materials from suppliers and pay the necessary GST on this input. Using these, they manufacture the finished products and sell them to customers, charging GST prescribed for the products, greater than the input GST. When filing ITR, business owners can claim an Input Tax Credit worth the tax paid on raw materials. Therefore, they are only paying the difference between the output GST and input GST.
- Advantages for the logistics sector
Before GST implementation, businesses had to bear taxes like entry tax, octroi tax, etc., on transportation of raw materials, contributing significantly to logistics costs. Elimination of these taxes and inter-state check posts together helps in cutting down on transportation cycle times and product transportation costs. This increases logistics efficiency to a great extent and serves as an extremely beneficial impact of GST on small and medium businesses.
- Extension of tax exemption limit
Under the earlier taxation system, businesses dealing in goods had to pay VAT when their annual turnover exceeded Rs.5 lakh. The exemption limit for service providers was Rs.10 lakh. Under the GST regime, the initial tax exemption limit for all businesses was set at Rs.20 lakh. Under a later revision applicable from 1st April 2019, all businesses can enjoy tax exemption if their turnover is less than Rs.40 lakh annually. The exemption limit for traders in the North-eastern or Special Category states is set at Rs.20 lakh.
- Removal of distinction between goods and services
Previously, taxes on products used to be charged under the Value Added Tax (VAT) system, while the taxes for services were charged separately under the Service Tax regime. Businesses offering both services and goods had to go through the hassle of computing each tax separately. This process has been made remarkably easier under GST by clubbing both of these taxes together. To make your ITR filing process easier with this single tax, know how to register for GST online.
- Composite scheme
Small businesses can especially benefit from the composition scheme, which an essential part of what is GST. Entrepreneurs with an annual turnover of less than Rs.1.5 crore can register under this scheme and enjoy lower tax liability by paying tax worth 1% of their turnover. The exemption limit was extended from Rs.1 crore to Rs.1.5 crore in the 32nd GST Council Meeting and came into action on 1st April 2019.
Small service providers, on the other hand, need to pay taxes at 6% if their annual turnover exceeds Rs.50 lakh. The limit for businesses in North-eastern states continues to be Rs.75 lakh. Note that entrepreneurs opting for the composition scheme cannot claim the previously mentioned Input Tax Credit (ITR) under GST. If the lack of these tax benefits leads to significant cash crunches, small businesses can opt for a business loan from NBFCs to meet financial requirements.
A brief description of what is GST is that it is a technology-centric tax regime. With the introduction of an online portal, GST has made filing returns extremely convenient for small business owners. Start-ups can now register online and e-file their GST returns. This digitalisation also enables them to correct any error in their filed returns and re-file them.
However, operating under GST requires businesses to install GST-compliant software that can add to operations costs. Besides, organisations need to train their workforce to use these new software systems and hire tax professionals to audit their accounts.
If you are one of the small businesses that lack the capital to fund such expenses, consider getting an unsecured business loan. Also, make sure to check your pre-approved loan offer to meet urgent financial requirements without much hassle.
This way, MSMEs can keep up with streamlined business operations under GST without having to worry about their day-to-day operational costs.