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What small businesses need to know about GST registration?

05 Jan 2023

GST could be a mixed bag for small and medium enterprises in India in the short term. However, in the longer term, the impact is likely to be a lot more positive and value accretive. The SME segment in India contributes to nearly 40% of the exports and nearly 70% of the total employment generated. The most enduring image of the post-GST scenario has been the large number of traders and small businessmen who have been protesting against the GST across India. There concerns are not entirely misplaced. GST will result in a sharp increase in compliance requirements and will also bring a lot of untaxed entities into the taxation fold. Here are the key take-aways from the perspective of a small business..
1.  They can now have a single common registration online..
This is a far cry from the current situation. Currently, businesses are required to register under various tax imposts separately. For example, they need to separately register for excise duty, VAT, sales tax, service tax etc. All this can be now subsumed into one single GST registration. Even though you require separate registration for different states, the process is the same and the entire process can be done online along with e-verification and authentication. The actual GST payable is split into SGST, CGST and IGST, but only one single registration is required for all of them. The GST registration also substantially does away with the physical paper work as most of the uploads can be managed online and digitally signed. This is quite contrary to the current situation wherein the business is required to register under VAT in each state for turnover in excess of Rs.5 lakhs making the entire process cumbersome. And, if you are an existing taxpayer, then you are automatically migrated to the new system with minimal hassles and procedures involved.
2.  GST increases the threshold for GST registration for small businesses
To reduce the compliance pressure on small businesses, the GST Council has set a limit of annual turnover of Rs.20 lakhs for registration under GST. Businesses with turnover below this threshold do not require GST registration. Of course, this limit stands further reduced to Rs.10 lakhs in case of North Eastern states. Turnover includes actual sales and sales by way of samples and that needs to kept in mind while calculating your turnover. However, there are certain exceptions to this rule. Firstly, if the supply of goods is inter-state, then GST registration is mandatory irrespective of the value of turnover. Also, this threshold limit is only applicable to manufacturing and not to services. It needs to be said, that this should surely come as a relief to very small traders and businesses.
3.  There is also an additional benefit under the Composite Scheme
In addition to the threshold of Rs.20 lakhs for registering for GST, the GST Council has offered an additional benefit for small businesses in the form of the Composite Scheme. Under this scheme, businesses with turnover of up to Rs.75 lakhs per annum can opt for this scheme, where the business can pay a flat tax in the range of 1-5%. However, there are some conditions and exceptions to this scheme. The Council has specifically earmarked select businesses where this scheme will be available. Secondly, this scheme will not be available for any business that is involved in inter-state sales. Lastly, when you avail the composite scheme, you are not entitled to any input tax credit (ITC) on the tax paid by you on the inputs.
4.  Access to a common national market across India
This is a major benefit for small businesses. In the old tax regime, most industries were required to maintain bulky distribution and logistics networks as these networks were designed to meet the needs of state level tax minimization. In the new dispensation, distribution and logistics networks will be driven by business needs and hence even small companies will get a level playing field with the larger ones. This common market across India will be a big boon for small companies and businesses who want to expand their national footprint with minimal investments. Many of the small businesses have been averse to the higher compliance requirements under the GST. However, they need to appreciate that under the GST the creation of a seamless national market will more than compensate for the higher compliance requirements.
5.  The benefits of ITC will add value to small businesses
One of the major flaws in the current taxation system was that it had a huge cascading effect. That means the same product got taxed at different levels of production leading to higher costs and lower levels of pricing efficiency. For many small businesses, this almost made their business models uncompetitive. The big advantage of GST is that it is a value-added tax and therefore is only imposed on the value addition. So, if your final GST payable is Rs.500 and you have already paid GST of Rs.200 on inputs then you only need to pay Rs.300 as net GST to the government. This reduces the cascading effect. Many small units were utilizing a lot of services for manufacturing their product and paying service tax on these services. However, they were not getting any credit for the service tax paid while calculating their eventual tax liability. That problems will get resolved under GST.
For small and medium sized businesses, there are certainly some immediate challenges. These small businesses will have to put up with greater compliance requirements and also cede a level playing field to larger players in the organized segment. At the same time, they get the benefits of input tax credit (ITC) as also a much larger market to expand their footprint. On a net basis, the small business should stand to gain from GST!

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