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Guest Column: GST pathbreaking, but may burden unstable startups: Hamid Farooqui, SoGoSurvey

Guest Column: GST pathbreaking, but may burden unstable startups: Hamid Farooqui, SoGoSurvey

Author | Hamid Farooqui | Friday, Jun 02,2017 7:58 AM

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Guest Column: GST pathbreaking, but may burden unstable startups: Hamid Farooqui, SoGoSurvey

Despite the standoff over the Goods and Services Tax (GST) Bill, the program towards its implementation has been on course. The comprehensive tax law will bring reforms marking a model shift in the taxation system. It will impact businesses of all sizes, including startups.

 Variations pursued by the GST
The tax law would be extended in its effect on the manufacturing, sale and consumption of goods and services throughout India. It would replace various different taxes that the Centre and State governments charge separately. It would be collected at each stage on the basis of the input tax credit method, in which taxes paid in other states can be claimed. This would allow registered enterprises to claim a tax credit in proportion to the value of GST that they paid on the purchase of goods and services in other states as part of their day-to-day profitable activity. Goods/services are not discriminated from each other and are taxed at a flat single rate in a supply chain till they reach the consumer.

Gains for startups and enterprises
GST would eliminate surging or double taxation and enable a shared national market, leading to improved collections. GST would help businesses save on taxes overall and remove the complexity of taxes that enterprises have to encounter due to the various taxes levied at different stages. GST would prevent or at least de-incentivise the temptation for tax evasion.

What is happening under the present regime is that big corporate houses “stock transfer” goods to other states as they have the logistics and the infrastructure to do that. Consequently, they escape paying tax on interstate movement. However, startups and small enterprises are unable to do that as they don’t have the infrastructure. Therefore, they acquire goods through interstate sales (in place of stock transfers) and end up paying Central sales tax. In this regard, the GST brings startups and small enterprises at par with big corporate houses by taxing stock transfers too.

Disadvantages of the anticipated GST
There are a sizable number of startups that do not think the tax is good news; they say that the principle of equal treatment for startups and big corporate houses removes the safety net that they used to enjoy earlier. GST proposes to reduce the tax exemption threshold for business units. On the other hand, GST recommends significant lowering of the limit, which, according to some reports could be as low as Rs. 25 lakh. Subsequently, a number of startups would come under the tax net. Besides those affected by the principle of parity, there are several others sitting on the fence, preferring to wait and watch for the time being.

Negatives and Positives
If we look at the overall picture, the GST may be truly path-breaking in streamlining taxes in India, removing arbitrary exemptions and making businesses more tax-compliant. However, it can also potentially present an extra financial burden for unstable startups.
There would be a price to be paid. Apart from training employees, processing invoices as per the new model and meeting compliance regulations, companies will have to modify their existing accounting software that is used to generate invoices and payroll.

Conclusion
The GST is a radical shift. It will affect every member of the society and the business world. The smallest change in the tax chain leads to a domino effect, affecting the entire structure from the top to the bottom. Businesses, particularly startups, need to brace for the changing regime. They must know which taxes to pay, how the tariffs apply, the quantum of the taxes and the procedures for calculation. It is easier said than done. Looking at the radical nature of the reform, it’s best that the GST is tried out in a phased manner.

(The author is the CEO of SoGoSurvey)

Disclaimer: The views expressed here are solely those of the author and do not in any way represent the views of exchange4media.com

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