Impact Of GST On Startups

A decade ago, we may not be aware of the word 'Startup' but now it has become one of the most searched keywords on search engines. Startups are usually small and initially financed or operated by a handful of founders. These companies offer a product or service that is not currently being offered elsewhere in the market, or that the founders believe is being offered in an inferior or unorganized manner. To nurture the start-up entities, many new start-ups have also emerged to incubate them. The incubators are must support the start-ups in their initial phase. Though a start-up may take years to generate the profit, they start generating the revenue in initial years. Start-ups may defer the payment of income-tax but they are liable to pay GST from the moment they cross the threshold limit (Rs 20 lakh or Rs 10 lakh as the case may be).

On July 1, 2017, India witnessed its one of the biggest tax reforms since independence, Goods and Services Tax. The GST subsumed almost all the indirect taxes levied by the state government and the central government, i.e., VAT, Service-tax, Excise Duty, Octroi, etc. A very few exemptions have been given to the Industries from the levy of GST. Rather than specifying the goods or services which are subject to GST, the Govt. has issued a negative list of goods or services which are exempt from tax.  Thus, it has impacted almost all Industries, including start-ups.

It is believed that India stands third as the Top Global Tech Innovation Leader and contribution of start-ups in such tech innovation has played a vital role. It is expected that the numbers of new start-ups shall increase in the coming years due to the benefits they could get from GST.

With the rollout of GST, the startups are now able to save their time, efforts and money which was earlier wasted in compliance with multiple state and central levies. In the new regime, they have to comply with just a single levy i.e. GST. Efforts and money saved from compliance can be channelized by the start-ups in innovation in their core areas which will benefit them and nation.

The success ratio for new startups is less than 1%. The reasons for such failure could be attributed to various internal and external factors, inter-alia, shortage of funds for routine compliances and inaccessibility to tax professionals, etc. With GST rollout, the startups find it much easier to comply due to the compliance friendly system which includes Composition Scheme, facility of online payment, simple forms across India etc. GST, therefore, helps startups to focus on managing and expanding operations rather than on the tedious process of tax compliance.

The GST has drastically reduced the delivery time of goods due to the removal of state barriers and similar rules in all the states for the movement of goods. The introduction of the e-way bill is expected to act as a catalyst for the even smoother movement of goods between states. This reduction of delivery time and the logistics cost will have a far-reaching impact on the startups which involves delivery of goods.

Anything, which brings a change along with the benefits, brings a lot of other difficulties and problems which affected them adversely. Earlier, manufacturing units having a turnover of less than 1.5 crore did not have to pay any duty or get registration under excise. Now, under GST this threshold is drastically reduced to as low as 20 lakhs. This has brought many small start-ups under the tax net, thereby impacting their bottom-line. The startups that are into e-commerce are required to get registration even if their turnover is less than Rs 20 lakh, which is creating a need of more compliance startups.

With the GSTroll out, it has become mandatory to upload invoices and make an e-way bill on a real-time basis which has overburdened the startups to focus on the tax compliance regularly which ultimately affects their innovational capability. These compliances also mandate the requirement of extra manpower which ultimately leads to leakage of money from already financially poor startups.

On a conclusive note, we can conclude that the GST has far-reaching impacts on the startups and the benefits certainly outweigh the negative impacts it has caused to the startups. Further, it is recommended that the Government should take more steps with the introduction of various special measure or exemptions for the innovative startups and the young entrepreneurs doing their business on an e-commerce platform. A relaxation in GST rate can also be provided for start-ups like area-based exemptions existed in Excise to boost innovation in the country. The government can also make simpler rules for audit, accounts, tax deposition and return filing of the startups to boost the startup ecosystem and reduce the failure rate of the startups.