Implementing GST helps make business operations easier for startups and other companies. By combining various taxes into one system, GST reduces the hassle of dealing with multiple taxes and brings new-age companies into the formal tax system.
This unified approach provides tax exemptions and several benefits that make running a business smoother. Let’s have a look at a sample of one Indian startup – UrbanClap, now known as Urban Company, that benefited from GST implementation. As a platform that connects customers with service professionals for home services, beauty, wellness, and more, UrbanClap had to deal with multiple taxes across different states.
Before GST, managing various state taxes was complicated and time-consuming. With the introduction of GST, UrbanClap streamlined its tax processes.
The unified tax system simplified compliance, reduced the administrative burden, and allowed UrbanClap to focus more on expanding its services and improving customer experience. This operational efficiency contributed to their rapid growth and success in the Indian market.
What are the main benefits of GST implementation for Startups
1. Simplified Tax Registration
Startups, often constrained by budgets and resources, benefit from a single GST registration process, replacing multiple requirements for excise, VAT, service tax, and sales tax. Post the 22nd GST Council meeting, businesses with a turnover of up to ₹1.5 crores can file quarterly returns, further easing tax compliance and allowing more focus on business growth.
2. Input Tax Credit Advantage
For small manufacturers, the input tax credit (ITC) system is transformative. Startups can claim back GST paid on capital investments and office supplies, reducing overall tax liability and enhancing cash flow. Regular ITC claims lower upfront costs, providing more funds for business expenses.
Let’s look at calculation in the sample:
A startup called TechGadgets manufactures electronic gadgets. During a particular month, TechGadgets made the following purchases and paid GST on them:
- Capital Investment:
- Purchased machinery for manufacturing: ₹200,000
- GST paid on machinery: 18% of ₹200,000 = ₹36,000
- Office Supplies:
- Purchased office furniture: ₹50,000
- GST paid on furniture: 12% of ₹50,000 = ₹6,000
- Raw Materials:
- Purchased raw materials: ₹100,000
- GST paid on raw materials: 18% of ₹100,000 = ₹18,000
GST on Sales
During the same month, TechGadgets sold finished products worth ₹400,000 and charged GST at 18% on these sales.
- GST collected on sales: 18% of ₹400,000 = ₹72,000
ITC Calculation
TechGadgets can claim the GST paid on purchases as ITC. The ITC for the month is calculated as follows:
- Total GST paid on purchases:
- GST on machinery: ₹36,000
- GST on furniture: ₹6,000
- GST on raw materials: ₹18,000
- Total ITC available: ₹36,000 + ₹6,000 + ₹18,000 = ₹60,000
Net GST Payable
The net GST payable after claiming ITC is calculated by subtracting the ITC from the GST collected on sales:
- GST collected on sales: ₹72,000
- Less ITC claimed: ₹60,000
- Net GST payable: ₹72,000 – ₹60,000 = ₹12,000
As a result, by claiming ITC, TechGadgets significantly reduces its GST liability from ₹72,000 to ₹12,000. This reduction in tax liability improves cash flow, allowing the company to allocate more funds towards other business expenses and growth initiatives.
3. Unified Tax System
GST consolidates various taxes into a single system, reducing the cascading effect and the overall tax burden. Businesses now operate under a “one nation, one tax” system, simplifying compliance, paperwork, and accounting.
4. Higher Registration Threshold
GST raises the registration threshold from ₹5 lakhs (under VAT) to ₹20 lakhs, exempting many small businesses from extensive paperwork and compliance. This higher threshold reduces the administrative burden and allows startups to focus on growth.
5. Efficient Online Registration
The faster, minimal-paperwork online registration process suits digital-first companies, reducing entry barriers and red tape. This efficient system enhances convenience and planning for startups.
6. Simplified Tax Calculation
GST simplifies tax calculation with predefined rates and a composition scheme for small businesses. Unified TDS collection and fewer return filings make administration easier and more transparent.
How does it work?
Under GST, the government has categorized goods and services into different slabs with predefined tax rates. These rates are standardized across the country, eliminating the confusion caused by varying state taxes. Here are the key points:
- Predefined Rates: GST rates are categorized into 0%, 5%, 12%, 18%, and 28%. Each category of goods and services falls into one of these slabs, making it straightforward for businesses to determine the applicable tax rate. For example, essential goods like food items may fall under the 0% or 5% slab, while luxury goods could be taxed at 28%.
- Consistency: The uniform tax rates across the country ensure that businesses do not have to deal with different tax rates in different states, simplifying the pricing strategy and reducing compliance costs.
The GST composition scheme is designed to ease the tax burden on small businesses by allowing them to pay a fixed percentage of their turnover as tax, instead of the standard GST rates.
- Eligibility: Small businesses with an annual turnover of up to ₹1.5 crore can opt for the composition scheme.
- Simplified Tax Rate: Under this scheme, manufacturers and traders pay a lower tax rate of 1%, and service providers pay 6%.
- Reduced Compliance: Businesses under the composition scheme are required to file quarterly returns instead of monthly, significantly reducing the compliance burden.
7. Special Provisions for E-commerce
GST standardizes e-commerce regulations, replacing varied state policies and simplifying compliance for online businesses. For example, online platforms like Amazon and Flipkart no longer need to adapt to different tax systems for each state, which simplifies their operations and reduces administrative costs.
Overall, GST has created a more business-friendly environment in India, promoting ease of doing business and fostering a robust ecosystem for new-age companies. By simplifying tax processes and reducing compliance burdens, GST enables startups and e-commerce platforms to expand their operations and compete more effectively on a national scale.
The Rainex billing platform further simplifies tax compliance for businesses by integrating automatic GST calculation into its billing processes. Our smart and flexible platform not only handles billing but also ensures that the correct GST rate is applied to each transaction based on the latest tax rules. By automating the calculation and application of GST, Rainex helps businesses avoid errors and ensures compliance with tax regulations without additional effort.
