Goods and Services Tax (GST) implementation has primarily impacted the way start-ups operated in India. It has significantly increased the number of new start-ups in the past three years of successful implementation. The advent of a new tax regime was crucial to abolish various indirect taxes. GST rules for startups were introduced with the slogan “One Nation One Tax” to ease the compliance procedure for MSME, especially for start-ups.
Eligibility for New Start-ups in India
The start-up India campaign was proclaimed by Prime Minister Narendra Modi in 2016 to encourage entrepreneurs and boost India’s entrepreneurship. The campaign was focused on promoting bank financing, simplifying incorporation processes, granting tax exemptions and providing other benefits to the start-ups.
In India, start-ups can leverage several benefits and exemptions under GST, provided they qualify to be an “Eligible Start-up”. What are the necessary conditions to be met for a new business to be eligible as a start-up? There are various conditions to be fulfilled by a company to become an eligible start-up. As per the Start-up India Action Plan, the following criteria makes suitable to become a start-up.
- A business has to be incorporated or registered in India for about seven years (ten years for biotech companies) from the date of incorporation.
- Annual turnover of business should not exceed INR 25 crore in any of the previous financial years.
- An eligible start-up is a business aiming to work towards innovation, invention, deployment and commercialization of business processes, goods or services. Start-ups must be technologically advanced; driven by intellectual property and technology.
- A start-up cannot be formed by reconstruction or break-off of a business that already exists.
- A start-up venture is mandated to obtain an eligibility certificate from the Inter-Ministerial Board setup.
- A start-up can be registered either as a private limited company, registered partnership or limited liability partnership.
Impact of GST on Start-ups in India – GST Benefits
The Goods and Services Tax (GST) in India has successfully subsumed all the indirect taxes, curating a unified tax system. As mentioned above, the “One Nation One Tax” regime has created a positive impact on emerging start-ups. Several start-ups across the nation have been enjoying the benefits GST has been offering over the years.
GST Registration – Higher Threshold Limit for Start-ups in India
As per the previous tax system, businesses with a turnover exceeding INR 5 lakh in a financial year (FY) were mandated to register under the VAT system. Since the GST implementation, companies with a turnover exceeding 40 lakh (20 lakh for service providers) in a financial year are mandated to register under the gst regime.
The higher threshold limit under GST aims to provide compliance relief for small businesses, including startups in India. GST regime has also introduced the composition scheme for small businesses and entrepreneurs in India, lowering the amount of tax for start-ups having an annual turnover up to INR 1.5 crore.
Tax Credit on Purchases
Before GST, service-oriented start-ups were supposed to collect and pay service tax to the government. Since most start-ups in India fall under the service industry, non-utilization of VAT paid on business transactions was one of the major concerns. No provisions allowed to claim credits on state VAT amount paid against the service tax liability.
Since GST has bought several indirect taxes under a single tax system, availing ITC is no longer a matter of concern. Start-ups can now set off taxes paid on their purchases with the taxes on their sales under the Goods and Services Tax (GST) regime.
Hassle-Free GST Registration & Return Filing Procedures
Over the past decade, India has transformed primarily by moving from manual operations to digitalization. Businesses no longer have to run around from one government office to another and submit paper files to obtain a GST registration number. Digital India has made each process a lot simpler and extremely quick.
Once all the books of accounts under Gst are arranged, getting a registration number is a no brainer task.
Several start-ups undergo the burden to budget-strain; these start-ups can now benefit from the GST regime. Since its implementation, GST has increased the threshold limit for registration and tax credits on purchases. The ease in the return filing processes has brought relief to start-ups and small businesses in India.
Simplified Tax Calculations
Start-ups often work with a constrained budget; they cannot afford to allocate different resources to take care of various compliances under Excise, CST, VAT, Service Tax etc. The GST regime’s advent has instead simplified tax compliance procedures, thus saving time for start-ups to better focus on other business operations.
It is much easier for start-ups dealing with both goods and services to file single tax returns and pay GST instead of multiple compliances and tax payment. As per the 22nd GST council meeting held on 6th October 2017, Start-ups with annual turnover up to INR 1.5 crore can submit quarterly returns; taxes are paid quarterly. The compliance relief aims to ease the tax burden for small businesses and start-ups in India.
E-Commerce & Online Start-ups in India
Modern start-ups are primarily driven by technology; most Newly Start Ups today leverage online presence rather than giving it all into the conventional setups. They transact online, that is, selling products and services through the internet.
E-commerce and other online start-ups face no complications regarding the inter-state movement of goods as GST is applicable throughout the country.
Previously, different VAT tax was applicable in different states. For instance, an online website delivering goods to Karnataka must have the registered delivery truck and VAT declaration file for that state. The state’s tax authorities might seize the goods under circumstances where there is a failure to produce necessary documents.
However, states like Rajasthan, Kerala, and West Bengal treat these suppliers as facilitators or mediators and do not require registering for VAT. All these differences in treating supplies usually created confusion in compliances. GST has subsumed all these under a single tax regime to remove the hassle of tax compliance.
Increased Efficiency in Logistics
In India, logistics businesses maintained multiple warehouses across states to rid of the CST and state entry taxes on inter-state movement of goods. Most warehouses operated below their capacity increasing their operating costs. Currently, GST has removed the restrictions on inter-state supply of goods, bringing warehouse consolidation across the nation.
As a result of this, warehouse operators and e-commerce businesses in India show interest in setting up warehouses in strategic locations. It reduces unnecessary logistics costs, increasing the profits early for start-ups involved in the supply of goods through transportation.
Tax Burden on Manufacturing Start-ups in India
Start-ups in the manufacturing industry bear the brunt. Manufacturing businesses with an annual turnover above INR 1.50 crore were liable to pay excise tax as per the excise laws in India. However, GST has reduced this turnover threshold to INR 40 Lakh increasing the tax burden for several manufacturers.
Tax Exemptions under the Start-up India Program
The flawed Tax system in India is a story from the past. GST has eradicated all the tax compliance confusion and eased the processes for businesses across the nation. Here are some of the necessary tax exemptions allowed for eligible start-ups in the country.
1. Tax Holiday for About 3-Years in a Block of 7-Years
Start-ups incorporated between 1st April 2016 and 31st March 2021 are eligible for this scheme. However, as mentioned above, budget 2021 has extended the tax holiday for businesses incorporated till 31st March 2022.
These start-ups are eligible to claim a 100% tax rebate on their profits for three years in a block of seven years, provided their annual turnover threshold doesn’t exceed INR 25 crores in any financial year. The scheme aims to help start-ups meet their working capital requirements during the initial years of incorporation.
2. Tax Exemption on Long-Term Capital Gains
Businesses that invest for long-term capital gain in a fund notified by the Central Government within six months from the date of transfer of business assets are exempted from paying taxes on such long-term capital gain under section 54 EE. The maximum amount a business can invest in specified long-term assets is INR 50 lakh. For three years, such amount remains invested in specified funds. In case companies withdraw before the span of 3 years, the exemption will be revoked respectively.
3. Tax Exemptions on Investments Above the Fair Market Value
Eligible start-ups above the fair market value are exempted from levying taxes on investments. These investments include resident angel investors, funds that are not registered under capital venture funds, and family. Any investments made by the incubators above the fair market value is also exempt.
4. Tax Exemption to Individuals/HUF on investments in Equity Shares
Section 54 GB exempts taxes on long-term capital gains for the sale of residential properties. It is applicable when gains are invested in the Smaller and Medium Enterprises Act, 2006. Recently the section has been amended to include exemption on capital gains invested in the start-ups.
Individuals or HUF’s sell residential property and invest in the capital gains to subscribe 50% or more equity shares for the start-ups. In this case, tax on long-term capital gains will be exempt provided these shares remain unsold or not transferred within the five years from the date of acquisition. The start-ups can also benefit from the amount invested on purchasing assets, provided they have not transferred assets purchased within five years from the date of purchase.
This scheme under GST aims to boost capital investments for start ups and to promote their growth and expansion.
5. Set-Off Carry Forward Losses & Capital Gains
Businesses can carry forward their losses if all the shareholders in an eligible start-up carrying the voting power on the day in which losses were incurred. GST has provided relaxations on the previous restriction of holding 51% of the voting rights remaining unchanged under Section 79 for eligible start-ups.
6. Consequences of Tax Evasion under GST Laws
The GST Council of India has now mandated e-invoicing and digital return filing processes to curb tax evasion. A practical implementation of Gst Act requires strict penalties against offenders.
It is crucial to understand the know-how of the GST laws. Otherwise, start-ups and new businesses might have a hard time dealing with penalties.
Here are some of the common offences under GST for small business in India and their penalties.
- Penalty for not registering under GST
10% or INR 10,000 penalty for tax due, whichever is higher.
- Penalty for not issuing GST invoices
10% or INR 10,000 penalty for tax due, whichever is higher.
- Penalty for not filing GST returns
10% or INR 10,000 penalty for tax due, whichever is higher.
- Penalty for committing fraud under GST
10% or INR 10,000 penalty for tax due, whichever is higher.
- Penalty for not filing GST returns in time
The late fee is INR 200/day (INR 100/day under the CGST Act & INR 100/day under the SGST Act) will be applicable up to a maximum fine of INR 5,000.
- Penalty for utilizing the composition scheme even though the start-up is not eligible
In case of fraud – as per Section 74, a penalty of INR 10,000 or 100% of the tax due (whichever is higher) will apply.
In case of no fraud – a penalty of INR 10,000 or 10% of the tax due (whichever is higher) will apply.
- Penalty for unlawfully charging higher GST rates
10% or INR 10,000 penalty for tax due, whichever is higher (in case additionally charged GST amount is not submitted to the government).
- Penalty for unlawfully charging lower GST rates
10% or INR 10,000 penalty for tax due, whichever is higher (in case additionally charged GST amount is not submitted to the government).
- Penalty for filing incorrect GST returns
A penalty of INR 25,000.
- Penalty for issuing incorrect invoices
A penalty of INR 25,000.
- Penalty for unlawfully charging the wrong GST type (IGST/CGST/SGST)
There is no penalty charged for this type of tax evasion. Businesses can pay the right GST amount and claim for a refund on the wrong GST payment made earlier.
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