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As a major tax reform, Goods and Service Tax (GST) unifies a variety of indirect taxes levied by the central and state governments. As a destination-based tax system, GST will be levied at various stages of production and distribution of goods and services.
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As a major tax reform, Goods and Service Tax (GST) unifies a variety of indirect taxes levied by the central and state governments. As a destination-based tax system, GST will be levied at various stages of production and distribution of goods and services. Various products and services will fall under one of the four GST tax slab rates – 5%, 12%, 18% and 28%. Hence, GST will make certain products and services more expensive, while bringing down the cost of other products and services. The GST Act further aims to include more small and medium enterprises in the tax payer base. That is why; GST impact will be different for different sectors, startups and SMEs. Some of them will see positive GST impact whereas for some other, the impact will be negative.
Assessing GST Impact on Small and Medium Enterprises Reduced Tax Burden In the pre-GST era, any enterprise with more than Rs 5 lakh annual turnover was required to pay VAT registration fees. But the GST Act increases the basic tax exemption limit to Rs 20 lakh for most states. The basic tax exemption limit for enterprises in the North Eastern States is also increased to Rs 10 lakh. Hence, the start-ups and SMEs with an annual turnover of Rs 20 lakh are not longer required to pay any VAT registration fee. The basic tax exemption limit will enable many SMEs to reduce tax burden and maintain positive cash flow.
Unification of Indirect Taxes GST unifies a number of indirect taxes levied by both central and state governments. The enterprises are no longer required to pay taxes according to varying tax rules of states. Also, they are not required to complete VAT registration in various states. Hence, it becomes easier for SMEs to provide goods and services to customers across states. The centralized registration process will further simplify the process of starting a new business and expanding existing businesses.
Tax Credit Earlier, SMEs have to pay additional tax on interstate sale. Many SMEs were selling their products to customers living in same state to avoid paying additional tax. The additional tax burden was further dissuading many startups and SMEs to expand their businesses. The GST Act allows enterprises to avoid paying additional tax on interstate sales through tax credits. The enterprises can avail tax credit regardless of the geographical location of the buyer and seller.
Simplified Legal Proceeding The GST Act does not differentiate between goods and services. Hence, the enterprises are no longer required to calculate VAT on goods and service tax on services. They can now calculate GST on goods and services at specific rates. The unified tax further eliminates the ambiguity related to material and service components of a transaction. Also, GST simplifies the legal proceedings related to both goods and services.
