GST and The Great Indian Startup – What the future holds for this booming sector

There was a time in India when being an entrepreneur got you really sad looks, and a hopeless marriage profile (which as everyone knows, is worse than a hopeless work profile). Then the Silicon Valley found its second home in India, with Bangalore being the first choice, and saying that you were the founder of a ‘startup’ became the new cool. What started in the mid 2000s as a trickling back of California-bred NRIs looking for greener pastures to spread their wings has now become a tour de force of innovation and technology. So much so, that the government decided to start its own scheme called ‘StartUp India, Stand Up India’ in 2015 to give this rapidly growing sector a helping hand. It’s a smart move to rope in and formalise a chaotic industry that still managed to bring in $3.5 billion (Q2-Q3 2016) in angel and direct investments.

So, yes. The startup boom in India has begun full flow. We rank third globally with over 4,200 startups and the number is set to increase to 10,000 by 2020. The sector employs over 85,000 professionals and is proving to be an important growth engine for India’s economy and society. With around 3 startups born every day in the country, one just has to ask – how will the new tax laws under GST affect a sector that is probably the next best thing since the internet boom of the 90s?

GST – What’s really good about it

When GST goes live in July this year, many startups are going to breathe a sigh of relief. Let us tell you the reasons why:

  • Increased limits for registration: Under the current tax laws, any business that deals in goods and makes a turnover of INR 10 lakhs per year has to register under the home state tax laws and get a tax identification number. For a service provider, this limit is set at INR 9 lakhs. The GST Council however, has chosen to set the limit for registration at INR 20 lakhs (10 lakhs for northeastern states and Uttarakhand.
  • Introduction of a ‘DIY’ compliance model: Startups love DIY, whether it is writing code or filing tax. GST aims to make taxation transparent and with all tax processes going digital, new startups that lack the resources to hire tax experts or a dedicated team for handling compliance can rest easy. From taxpayer registration, return submission, to tax payments and refund claims, startups can file details online.
  • Free flow of goods and services: According to a research done by TCIL, a truck carrying goods in India covers an average of 250-400 kms a day, as compared to 700-800 kms in European countries. Much of this is due to the long wait at check points, and while Indian states have asked for e-permits to replace the standard transports bills instead of doing away with it completely, one can hope that it will improve logistics and improve the speed of goods transport.
  • Tax credit on purchases: Startups in the service industry have to pay service tax. Under GST, such startups will be able to set off the VAT paid on their purchases (say on office supplies), with the service tax on their sales which they cannot under current regime.  For example, a startup buys office supplies of 20,000 paying 5%. It charges 15% service tax on services of Rs. 50,000. Currently it has to pay 50,000*15%= 7,500 without getting any deduction of Rs. 1,000 VAT already paid on stationery. Under GST (assuming GST= 18%) the calculation will be:

  • No more confusing laws: Indian states have very different VAT laws which can be confusing for companies that have a pan-India presence, specially the e-com sector. For example, online websites (like Flipkart and Amazon) delivering to Uttar Pradesh, have to file a VAT declaration and the registration number of the delivery truck. Tax authorities sometimes seize goods when there is a failure to produce said documents. Again, they are treated as facilitators or mediators by states like Kerala, Rajasthan, West Bengal which do not require them to register for VAT. With GST, since it will subsume VAT and other taxes, startups will only have to comply with a single nationwide tax. This should also better India’s ranking on the World Bank’s ‘Ease of Doing Business Index’ where currently we rank at 130.
  • High liquidity:  Many bootstrapped startups face the problem of having their capital stuck in tax refunds. But with GST making the processes easier and faster, startups can file for tax refunds online and hope to get their money on time. Ergo, high liquidity.

The final word

It is important to note that the threshold limit of 20 lakhs (for registration) does not apply to startups in the e-com sector. Startups in the manufacturing sector may have a hard time, too, once the new laws are in place as under the existing excise laws, only those manufacturers  with a turnover more than INR 1.50 crore have to pay excise. However, with the implementation of GST, the turnover limit has been reduced to INR 20 lakhs thus increasing the tax burden for many manufacturing startups. Despite this, experts and industry analysts are hopeful that the benefits of GST will outweigh its cons, and it will prove to be a lucky charm for Indian startups. 

 

This article was published in VC Circle.

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One Response to GST and The Great Indian Startup – What the future holds for this booming sector

  1. sumit April 21, 2017 at 3:16 pm #

    Nice Post.