GST affects small enterprises in a big way, here's a simple guide to understanding it

By Pankaj Jain

As the GST is set to be implemented from July 1, 2017, there is more and more anxiety and curiosity in the minds of entrepreneurs as they wonder how they will cope up with this radical shift in taxation regime. The concern is not without reasons. Just like every coin has two sides, GST also has its pros and cons. Let’s explore further, especially in the context of service sector startups.

The disadvantages are as follows:-

Multiple Registrations
As GST is a destination-based taxation regime, 'Place of Supply Rules' under GST say that the supplier of services will have to take registrations for each state wherever they have place of supply, even if it is a rented office. Earlier, a service provider used to take a centralized service tax registration and could do invoicing from one centralized place.

Number of returns
Each month there will be three separate returns to be filed with the GST department i.e. one for output supply, another for input supply and a third would be a consolidated one. And these are to be matched with the service provider’s respective customer’s/vendor’s returns. This will certainly increase the compliance cost as one person will just be doing this every month.

Changes in the formats of invoices, debit notes
There will be substantial changes in the format of invoices, like the GSTIN of the customer, serial number of invoices, self-supply invoice in case of services under reverse charge, etc.

Accounting software upgrade
All the changes in invoices and accounting of entries will require a major overhaul in the accounting software of the organization, along with training of staff to do the same.

Increasing working capital requirements
One of the peculiar features of the GST rules, which needs further clarification, is that the input credit will be set off with the output liability only after the return of the input credit is submitted. This means that input credit for services obtained in a particular month will be utilized in the next month, thus increasing working capital requirements. As startups run on very thin working capital, this may be a big problem area to deal with.

Burden to monitor your vendors
Under the GST act, the supplier of services will not be able to take input credit on services obtained from a blacklisted vendor. It means that there is an obligation to continuously monitor the rating of your vendors so that you may not lose out on your legitimate input credit.

Self-supply of services
Supply to another unit of the same entity are not subject to service tax as both the units are not treated as distinct parts. However, under GST, branches of an entity with different GST registrations are distinct taxable units. This would lead to increased compliances, including invoicing and credit tracking.

All these negatives come along with some substantial benefits under the GST regime:-

Increase in the exemption limit for registration
The limit of GST registration has been increased from Rs 10 lakhs to Rs 20 lakhs. It will take away many new startups from the ambit of GST, especially in their initial phases of growth, where they need to concentrate more on making themselves stand out.

Input credit of Goods
Under the current tax regime, the supplier of service is not able to take the benefit of the input credit of goods purchased for the business as VAT is a state subject whereas Service Tax falls under Central Taxes. Come GST and all the service providers will be able to take benefit of both as there is only one tax on both goods and services. This will substantially reduce the cost of business and the working capital requirement.

Set off of unutilized credit in branches
There is a concept of Input Service Distributor (ISD) under GST. Under this procedure, if one branch of the entity is not able to utilize the complete input credit related to its output services, it can transfer the balance credit to other branches or head office. This is very useful when there are higher expenses at one place but the revenue is lower. The organization as a whole will immensely benefit from this clause.

Online procedure
Of course, it is much easier to do all the compliances when the process is technologically driven. It will save time, energy and cost for doing compliances by sitting at one place for all the branches. Also the matching concept of invoices with your vendors and customers will help avoid any disputes.

Given all this, it is not going to be easy for the startups to smoothly transition to GST. It may take six months to one year to get oneself comfortable with all the nuances of new tax regime. The timely up gradation of systems, training of manpower, support from the government and the external consultants may somewhat ease the process but it is going to be a bumpy ride.

The Author is Associate Director – Finance, at Great learning, an online and blended learning startup. 


Published Date: May 29, 2017 03:48 pm | Updated Date: May 29, 2017 03:48 pm