For small businesses, costs of operation are multi fold,-various taxes, operational costs, etc. In the year 2017, the government introduced what was probably the next landmark economical decision after demonetisation- the Goods and Services Tax. This tax, already present in more than 150 countries in the world, still remains one of the most talked about reforms. Effective from April 1, 2019 the government increased the maximum limit of exemption for small businesses1. GST registration, however, is a voluntary decision that small businesses that are exempted can still make. Before going into the pros and cons, let us have a brief look at what GST is.
What is GST?
GST is an indirect tax that has replaced multiple indirect taxes like VAT, excise duty and central sales tax. It is a comprehensive, multi-stage, destination based tax levied on each stage of value addition. It has helped in removing the cascading effect of earlier taxes. It has helped businesses with a simpler procedure of filing taxes online among other benefits.
Who is required to register?
It is mandatory for some businesses to register under GST
- Businesses with a turnover of above Rs. 40 lakhs (Rs. 20 lakhs for North Eastern and hilly states).
- Businesses that sell inter-state
- E-commerce operators or aggregators with total sales above Rs.20 lakhs
Although it is not mandatory to register, small businesses can opt for registration voluntarily. The benefit of voluntary registration is debatable, and it is best to evaluate the pros and cons before taking a decision.
Input tax credit for customers
A GST registration will make your business legally recognized for issuing taxable invoices. Customers can then receive input credit on the purchases they make from your business, which can give your business a competitive advantage.
When you buy a product/service from a registered dealer, you pay taxes on purchase amount. When you sell, tax is collected and adjusted with the tax you already paid at the time of purchase. The balance liability of tax (tax on sale- tax on purchase) is to be paid to the government. This mechanism is called input tax credit.
Taking Input Credit
Voluntary registration will also give you the benefit of receiving input credit for your own purchases and services like legal and consultation fees, thus adding to their business margins.
Ease of making inter-state sales
There are quite a few restrictions for sales between states that you can do away with if you have a GST registration. It also gives you the opportunity to sell online and expand your business. Basically, expanding your customer base becomes much easier and smoother.
Good compliance rating
When the size of your business increases, you will have to eventually register for GST. But if you register at the very beginning, your business becomes not just compliant but also scalable as a registered firm. Since compliance ratings are assigned irrespective of nature and size of business, registration will ensure you have a good rating.
A good GST compliance rating can lend your business credibility in the eyes of customers, suppliers, and other businesses that you deal with. Acquiring capital goods and renting premises becomes easier. Getting a business loan becomes easier as well. This really helps when you need financing for upgraded machinery, advanced infrastructure, technology, etc. You can look out for Bajaj Finserv Business Loan, available on Finserv MARKETS, which comes with the advantage of zero collateral, fast online processing and minimal documentation.
A lot of small businesses are traditional and family-run. They are used to manual methods of accounting. GST registration as well as returns and payments are exclusively offline and may become a challenge for these businessmen.
Under GST, you are liable to file a total of three returns each quarter (GSTR-1, GSTR-2, and GSTR-3). These include purchases and sales, and also final tax liability after setting off the Input Tax Credit. If you don’t file returns, it will take away input credit from your buyers and also affect your compliance rating.
Once registered, suppliers will have an extra responsibility of collection and deposit of taxes. This will increase the cost to buyers, and give your competitors an advantage over you.
Compliance of provisions
Once you register, you will be liable to comply with GST rules, Acts, notifications. These include issuing of GST compliant invoices and payment of GST under the reverse charge mechanism.
The bottom line
The decision of registering for GST is a game of cost-benefit analysis. Consider three factors
In the case that your buyers and sellers have registered, it becomes important for you as well to register so that you don’t break the Input Tax Credit chain. Registered traders will not prefer doing business with unregistered entities. If your end buyers have not registered, it would be a good idea to not register yourself, it will save you the documentation and legal compliance hassles. If you are planning for expansion of business, you could opt for a composition scheme. It comes with lesser tax and fewer compliances. This makes it easier to get a bank loan. You could also opt for a business loan on Finserv MARKETS and a loan amount of up to 30 lakhs to funnel into growth. If you still not decided then read more on all about GST and components of GST only at Finserv MARKETS
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