6 benefits of GST registration in India for small businesses
For a long time, businesses and consumers in India had to deal with high indirect taxes and different rates across states within the country, leading to higher prices for goods in some areas and lower in others.
With the introduction of GST(Goods and Services Tax), tax is levied at the point of consumption from all the value added at every stage of the supply chain which has helped in reducing the prices of goods and services.
Along with this, businesses experience countless benefits of this regime making GST registration worth it for businesses that are eligible to apply for a GST number.
Goods and service tax was implemented in India from July 1, 2017. It was introduced as a single alternative to the many different types of indirect taxes including VAT, excise duty, services tax, etc. This was done in order to reduce the tax on tax and its cascading effect from the sale of goods and services in the supply chain.
GST for a small business is really beneficial as it simplifies the entire indirect tax structure into just one unified tax that is applicable to both, central and state governments. Let’s take a look at how exactly GST works.
In India, GST is not levied in the state where the goods and/or services are manufactured. It is applicable only in the state where the goods and/or services are consumed. This is why it is called a destination-based tax in this country. GST rates are included in the purchasing price of a product, it is levied at every point of sale. Here’s how GST works:
● The goods and services tax works as a tool for unifying the Indian market. It does this by replacing the numerous central and state taxes that were being levied during the previous tax regime.
● The GST is also understood to be a value-based tax. This is because GST is levied at every step of supplying a good or service where value is added. To explain, the tax is levied at every step of a supply chain where a supplier, wholesaler, manufacturer, distributor, or retailer adds value.
For instance, if a manufacturer produces a shirt with INR 100 and adds value worth INR 20 that means the amount taxable will be on the gross value of the shirt, i.e. INR 120. The same is applicable for any entity to which the manufacturer sells the shirt.
● GST works to reduce the tax burden that falls on manufacturers by eradicating the need to pay multiple taxes. This has helped bring about economic uniformity in the country that has contributed towards putting the country at par with global markets.
● The GST also promotes entrepreneurship in the country. In fact, taxpayers can reclaim any GST that they might have paid if they fulfil certain criteria outlined by the Indian government, this is one of the major advantages of the GST structure.
There are majorly four different types of goods & service tax in India:
IGST: IGST or Integrated Goods and Services Tax is a tax which is collected by the central government. It is levied on the supply of goods and services between 2 states and also covers imports and exports.
If a business is selling goods from Maharashtra to a retailer in Karnataka at INR 10,000 and the tax rate applicable is 18%, then the price of goods being sold will be INR 11,800. After the tax is collected, it is also divided between the two states involved.
SGST: SGST or State Goods and Service Tax is levied by a state when the supply of goods or services takes place within the same state. Although a transaction like this will be charged with both SGST and CGST, the state directly collects the SGST in such a case.
For example, if goods worth INR 1000 are sold within the state of Gujarat with a tax rate of 18%, the SGST and CGST are divided equally; in this case, that would be 9% as SGST and 9% as CGST. So the state government would levy INR 90.
CGST: Similar to SGST, CGST or Central Goods and Services Tax is a tax levied by the central government on the transactions conducted within a state, also known as intrastate trade.
This tax is controlled by the CGST Act. This tax works in tandem with SGST and is levied as an equal proportion of the tax rate.
UTGST: UTGST or Union Territory Goods and Services Tax is applicable as a replacement to SGST within all union territories of India including Chandigarh, Andaman and Nicobar Islands, Dadra and Nagar Haveli, Daman Diu, and Lakshadweep.
This tax is regulated by the UTGST Act and is levied on intrastate transactions along with CGST.
Suggested read - Online GST registration process: Step-by-step guide
1. Easy to start a business
Starting a business under the GST structure has become more streamlined as you won’t have to deal with different tax rules in different states. This centralized registration system cuts down on the time taken to establish a business as well as removes the high fees that one had to pay.
GST registration also makes it easier for businesses to carry out business transactions across state borders without having to deal with separate tax regulations.
2. Increased efficiency in logistics
Previously, due to the different tax rules, goods being transported to and from one state to another had to go through checks which took a considerable amount of time. One of the benefits of GST in India is that state cross-border transport of goods will now be much more efficient due to the reduced amounts of checks that one has to go through.
3. Simplified process
Since GST clubs all the different types of tax under itself, a GST business spends less time calculating all of them and experience a smooth tax-paying process.
4. Composition scheme
The government has also introduced tax composition schemes for businesses with an annual aggregate turnover rate of less than INR 1.5 crore.
5. Higher threshold for GST registration
Any business with a turnover above INR 40 lakhs have to register for GST. For service providers, GST registration is mandatory if the turnover is higher than INR 20 lakhs.
6. Eliminates the cascading effect of taxes
All the different types of tax that existed before, have been clubbed under either CGST or SGST as follows:
Central Taxes subsumed under GST:
● Central Excise Duty (including additional excise duties)
● Service tax
● Additional customs duty (CVD)
● Special Additional Duty of Customs (SAD)
● Central surcharges and cesses
State Government Taxes subsumed under GST:
● Value Added Tax
● Central Sales Tax
● Octroi and Entry Tax
● Purchase Tax
● Luxury Tax
● Taxes on lottery, betting & gambling
● State cesses and surcharges
● Entertainment tax
Doing this has enabled businesses to avoid the cascading tax on tax effect and made it much cheaper for everyone.
There is no doubt that the business impact of GST in India has been a significant boost for young startups and small businesses. It has given them an opportunity to grow and scale without too many complications of the financial system that existed previously in the country.
Related read - Your complete guide to GST and accounting
No, all goods and services are not taxable under GST.
Following are a few products and services that are taxable under GST but specifically exempt by notification - Fresh fruits, bread, milk, curd, etc.
● Zero rate supply - Exports and Supplies made to SEZ or SEZ Developers, of both goods and services.
● Nil-rated goods and services with a tax rate of ‘0’ under the GST Act - Jaggery, grains, salt, etc.
● Non-GST supply - Human consumption of alcohol, natural gas, electricity, petrol and its products, etc.
Since the implementation of GST, the tax rates have been changed multiple times for different goods and services. This can either result in higher or lower prices for the end-users depending on the product. For businesses, GST has reduced the overall cost of supplying their goods and services.
A simple formula for GST calculation:
GST Amount = (Original Cost*GST Rate Percentage) / 100.
Net Price = Original Cost + GST Amount.
IGST, SGST, and CGST are the different categories of GST that are levied by the central and state governments for the supply and sale of goods and services.