The Goods and Services Tax was implemented in India on July 1, 2017. It was considered as the most significant tax reform in independent India. Goods and Services Tax absorbed the majority of current indirect taxes, resulting in countrywide consistency of indirect tax incidence in India.
The Goods and Services Tax amendment provided states and the centre exclusive authority to tax products sold within their respective jurisdictions and money from such transactions is split between the union government and the state governments.
Impact of GST Registration on Businesses
The impact of registration under GST for businesses in India can be understood through its positive and negative impacts. These have been mentioned below.
Benefits of GST Registration for Businesses
GST has benefited businesses through a wide range of factors, which include:
Simplified Business Launch and Expansion:
Under the previous tax regime, businesses operating across multiple states had to navigate the complexities of registering for VAT with each state’s sales tax department. This process involved different tax rules and procedural fees, making it cumbersome and costly. However, under GST, the registration process is centralised, with uniform rules across all states. Obtaining a GSTIN (GST Identification Number) simply requires completing and submitting an online form. As a result, launching and expanding a business becomes easier and more streamlined under the GST regime.
Streamlined Logistics and Cost Reduction:
With GST, the Central Sales Tax (CST) on interstate sales has been replaced by the Integrated Goods and Services Tax (IGST), which combines the Central GST (CGST) and State GST (SGST) collected by the Central Government. The removal of border and check-post taxes reduces the significance of state boundaries, resulting in reduced delays and transportation costs. This facilitates faster movement of goods, lowers maintenance expenses and promotes inter-state business.
Elimination of Tax Cascading:
One significant advantage of GST is the elimination of tax cascading, a problem where taxes were levied on top of other taxes. With GST, businesses can now claim input tax credit for taxes paid on inputs, reducing their overall tax liability.
Higher Threshold Exemption:
Furthermore, GST has raised the threshold for tax registration, benefiting businesses. With GST, the threshold has been increased for the supply of goods from 20 lakhs previously to 40 lakhs (also from previously Rs.10 lakhs to Rs.20 lakhs for some of the special category states) reducing the tax burden on many businesses and giving them greater flexibility to expand their operations. The threshold is Rs. 20 lakhs for services now (Rs. 10 lakhs in special category states).
Improved Supply Chain Efficiency:
GST has also improved the efficiency of supply chains by eliminating interstate check posts and reducing paperwork. As a result, the movement of goods across state borders has become seamless and faster. This development enables businesses to expand their customer base and explore new markets without dealing with the hassle of interstate barriers.
Enhanced Competitiveness:
Another advantage is that GST has created a level playing field for businesses in terms of tax compliance and pricing. Previously, varying tax rates across different states caused price disparities, putting businesses at a disadvantage compared to larger enterprises. However, with GST, these disparities have been reduced, allowing businesses to compete more effectively.
Promotion of Formalisation:
The implementation of GST has encouraged businesses to shift from the informal sector to the formal economy. By registering under GST, businesses gain access to various benefits, such as input tax credit and participation in government tenders. This transition fosters transparency and accountability within the business sector.
Improved Credit Availability:
Under the GST regime, businesses can avail input tax credit on their purchases, including capital goods. This availability of credit has made it easier for businesses to invest in machinery, technology and infrastructure, fostering business growth.
Negative Impact of GST Registration on Businesses
However, GST has also brought in some negative impacts for businesses as well. These are:
Burden of compliance:
Businesses have seen various negative consequences as a result of the installation of GST registration. The growing compliance load placed on firms is one of the major challenges. They must now file taxes on a regular basis, keep extensive records and follow complex requirements. This is especially difficult for small enterprises with limited resources and employees.
Monthly Filing of Returns:
GST mandates the filing of a number of returns per fiscal year. These returns require businesses to close their books on a monthly basis, which can be time-consuming. Additionally, businesses cannot claim refunds or customers cannot claim tax credits until the relevant returns are filed. Failure to file a return may result in a penalty of Rs. 100 per day and a reduction in the compliance rating on the GSTN portal.
Mandatory Registration for E-commerce Suppliers:
E-commerce businesses are required to register under GST, regardless of their annual turnover. Unlike other businesses, e-commerce firms are not eligible for threshold exemptions or the Composition Scheme, which allows for quarterly tax return filings and lower tax rates.
Rise in Costs:
Another negative impact is the increased costs associated with GST compliance. Businesses’ often have to invest in accounting software, hire tax consultants and provide training to employees to understand the new tax system. These additional expenses can strain the financial resources of many businesses.
Cash Flow Issues:
Businesses, especially those involved in manufacturing or trading, may also face cash flow issues due to the introduction of the reverse charge mechanism under GST. This requires businesses to pay taxes upfront, even before receiving payment from their customers. This can have a significant impact on their working capital.
Limited IT Infrastructure:
Many businesses lack the necessary IT infrastructure and technological capabilities to smoothly transition to the online GST portal. The need for online filings and digital transactions can be a hurdle for businesses with limited access to technology or lacking expertise in navigating digital platforms.
Challenges in Transition:
During the transition from the previous tax system to GST, businesses face challenges such as understanding new rules and procedures, updating their accounting systems and adapting to revised invoicing requirements. This period of transition may have caused temporary disruptions and uncertainties for businesses.
How has GST Affected Other Business Sectors?
A sector wise impact of GST on various businesses has been mentioned below:
Logistics
The logistics industry, which plays a crucial role in our economy, has the potential for exponential growth under the Make in India initiative. Well-organised logistics are thriving with the implementation of GST.
Pharmaceutical and healthcare
GST’s simplified tax structure has benefitted the pharmaceutical and healthcare industries. This has helped to make healthcare more inexpensive and accessible to people of all income levels.
Agriculture and farming
Agriculture is a significant contributor to India’s GDP. With improved logistics, transportation costs for agricultural produce have also come down, benefiting the producers and wholesalers in the sector.
Automobile
GST has replaced multiple taxes applicable to automobiles, such as excise, VAT, sales tax, road tax, motor vehicle tax and registration duty. This change has led to a drop in automobile prices as producers save on taxes.
Startups
GST has brought several benefits to Indian startups, including a simplified compliance model, increased registration limits, streamlined movement of goods and services and tax credit on purchases. It has also simplified tax calculations for companies with a pan India presence, particularly in the e-commerce sector.
Impact of GST Registration on Compliance for Businesses
Under the GST regime, compliance requirements have been standardised, eliminating variations across states. The new requirements involve several aspects:
- Filing of Returns: Monthly, quarterly and annual returns must be filed by businesses, depending on their turnover and registration type.
- Timely Payment of Taxes: Businesses must pay GST on a monthly or quarterly basis, depending on the appropriate GST rates for their products or services. These payments are important to meet tax obligations and avoid penalties.
- Submission of Certified Financial Statements: In certain cases, businesses may be required to submit certified financial statements to demonstrate their financial position and compliance with GST regulations. These statements offer a comprehensive overview of the business’s financial activities.
- Government Agency Audits: Government agencies have the right to conduct audits to verify enterprises are in compliance with GST legislation. These audits generally involve a detailed investigation of the company’s records and other transactions for making sure they are compliant with the law.
- E-invoicing: E-invoicing systems have become very much common under GST. These systems generate invoices electronically and authenticate them through the GST Network (GSTN). This process streamlines invoice generation, reduces the likelihood of errors and ensures accurate reporting.
- Invoice-to-Invoice Matching: Impact of GST Registration introduces the concept of invoice-to-invoice matching, where businesses are required to reconcile their purchase and sales invoices to accurately claim input tax credit. This ensures that credits are claimed only for eligible transactions, minimising the risk of fraud or manipulation.
Final Thoughts
The implementation of GST has had a significant impact on business operations and compliance in India. It has brought several benefits for businesses, such as a simplified tax structure, streamlined business launch and expansion, reduced logistics costs, elimination of tax cascading, increased threshold exemption, improved supply chain efficiency, enhanced competitiveness, promotion of formalisation, encouragement of technology adoption, simplified business processes, expansion opportunities and improved credit availability.
However, there have been challenges, like increased compliance burdens, multiple registrations for pan-India businesses, monthly filing of returns, mandatory registration for e-commerce suppliers and operators, cost increases, cash flow issues, limited IT infrastructure, compliance complexity, impact on competitiveness, supply chain disruptions, transition challenges, impact on the unorganised sector and increased compliance penalties, which have impacted all businesses more or less the same.
For more information on the impact of GST on businesses and compliance, connect with our experts at StartupFino.
