The introduction of GST for in India has provided many advantages for businesses.
However, without a clear understanding of the GST system, businesses may face challenges in complying with the new tax regime.
Therefore, in this blog, let us understand the basics and benefits of GST for business owners, which help to reap the advantages of this tax reform.
Learning about GST can streamline business operations, improve compliance, and enhance competitiveness in the market.
GST stands for Goods and Services Tax and is an indirect tax.
On July 1, 2017, our Indian government introduced the GST to replace multiple direct taxes, which include:
It is implemented to simplify the tax system, which helps achieve the government’s vision of ‘One Nation One Tax’.
GST is a destination-based tax collected at multiple points in the supply chain, whenever value is added to a product or service.
This system streamlines taxation, promotes better compliance, and helps achieve transparent and effective tax collection.
Let’s take the example of buying a wooden table to understand how GST is levied at each stage of the supply chain.
Manufacturer -> Wholesaler -> Retailer -> Customer
| Stage | Purchase Price | GST Paid on Purchase (ITC) | Selling Price | 18% GST Collected | GST Payable to Govt (Collected – ITC) |
| Manufacturer | ₹1,000 | ₹180 | ₹2,000 | ₹360 | ₹360 – ₹180 = ₹180 |
| Wholesaler | ₹2,000 | ₹360 | ₹3,000 | ₹540 | ₹540 – ₹360 = ₹180 |
| Retailer | ₹3,000 | ₹540 | ₹4,000 | ₹720 | ₹720 – ₹540 = ₹180 |
| Total | — | — | — | — | ₹180 + ₹180 + ₹180 = ₹540 |
* ITC – Input Tax Credit
The final customer pays a total GST of ₹720 (18% of ₹4,000).
The businesses pay GST in parts, but claim credit for what they have already paid.
Why Should Small Business Owners Care About GST?
Every small business should care about GST because it is a consumption-based tax that directly affects the pricing of goods and services.
Understanding and following GST regulations can help small business owners avoid penalties and maintain good financial health.
I hope you all know this. Before GST, businesses had to register separately for indirect taxes.
Indirect taxes include:
To register each tax, you have to follow separate paperwork and multiple compliance rules. It takes a lot of time and is also a confusing process.
But, after the implementation of GST, the multiple taxes were combined into a single tax. So you just need one GST registration.
The GST portal is accessible online to businesses of all sizes, so they can register, file returns, and manage GST compliance anytime, anywhere.
The cascading effect of taxes, also known as ‘tax on tax’, is imposed on every stage of production and distribution, which leads to multiple taxes on the same products and services.
So, it results in higher tax costs for businesses and end consumers.
After implementing the GST, it eliminates the cascading tax effect by allowing businesses to get back input tax credit on the taxes paid on their purchases.
This leads to a lower overall tax burden for businesses and promotes economic growth.
One of the objectives of GSTs is to eliminate the various taxes to avoid confusion and promote a more uniform market across states.
So, it makes the process of doing business across different states easier and reduces compliance costs for businesses.
After the implementation of GST, the exemption limit for mandatory registration was raised.
So, the small businesses whose annual turnover is below this limit don’t have to register for GST, which reduces the burden on small businesses and allows them to focus on growth rather than compliance.
In addition, informal sector businesses are also encouraged to formalise their operations, leading to increased tax compliance and revenue generation for the government.
The composition scheme is one of the ways in which the GST system has been simplified for small businesses.
It allows eligible businesses to pay a fixed percentage of their turnover as tax, reducing the compliance burden and making it simple for them to manage their finances.
If your business makes less than Rs. 1.5 crore a year (or Rs. 75 lakh in special states), you can choose this scheme.
For example:
Your annual turnover is around Rs. 50 lakh, you are eligible for the composition Scheme.
So, it is not necessary to pay regular GST. You might pay 5% (rates vary by business type) of your total turnover as GST.
In India, many businesses are based on logistics. So, they need to have multiple warehouses strategically located across the country to ensure the timely delivery of goods.
Before GST, every state had its own taxes, like Octroi and CST on goods moving between states. This made interstate trade complicated and costly.
After the GST, the cost of moving goods between states dropped because of the single tax system across the nation.
Every purchase becomes transparent after the implementation of GST. You can see the tax amount clearly on the sales invoice.
GST also brought several new measures to make the tax system stronger and fairer.
These include linking GST registration with PAN to prevent duplicate accounts, invoice-level reporting and matching to ensure accuracy, and credit reconciliation to fix mismatches.
The compliance requirements and costs are reduced under GST.
It has simplified the tax structure through measures like the composition scheme and online convenience, reducing the burden of business owners from excessive paperwork and multiple tax regulations.
When the burden of compliance is reduced, businesses can concentrate more on their business operations and growth strategies.
GST benefits for small businesses include simplifying tax calculations and increasing operational efficiency.
It eliminates the need for multiple tax calculations and allows for easier compliance with tax regulations.
So the businesses can benefit from reduced paperwork and administrative burden, saving time and manpower that can be allocated to other areas of operation.
Bonus Advantage!
Many micro, small and medium enterprises struggled to comply with multiple indirect tax laws before the implementation of GST.
Now with standardised tax rates, online registration, and digital return filings, GST has made it simple and easy.
This is more helpful and facilitates hassle-free movement of goods across state borders, encouraging interstate trade and reducing logistical challenges for businesses.
After understanding the basics and advantages of GST, it’s equally important to look at the flip side.
No tax system is perfect, and GST is no exception.
Let’s see them here.
The operational costs of small businesses are directly impacted by the increased compliance burden of GST.
This can cause money problems and limit resources for these companies, making it harder for them to succeed in the marketplace.
For many micro, small, and medium-scale enterprises, it is a struggle to cope with the lower threshold for GST registration, as it adds an additional financial burden on their operations.
This becomes a major challenge for small business owners in the expansion and growth of their business.
For Instance
A small clothing boutique may find it difficult to absorb the costs of GST registration and compliance, which can result in higher prices for their customers or lower profit margins for the business.
Not all the MSMEs have the necessary infrastructure and awareness to effectively navigate the complexities of GST registration and compliance.
This lack of knowledge and resources can further exacerbate the challenges they face in competing in the market.
Registering for GST provides numerous benefits for small businesses.
Let’s see them one by one.
Ignoring GST is like welcoming silent losses.
The following are some of the issues when you are not registered for GST:
GST is a mix of opportunity and compliance challenge.
So, the small business owners need to understand the benefits and requirements of GST registration to make the right decisions that will positively impact their business growth and financial stability.
If you are still struggling to figure out and need clarity on these financial matters, getting guidance from the experts or a business coach can help you set business financial goals…
For more insightful business-related blogs, check out our blog library!
None can destroy iron, but its own rust can! Likewise, none can destroy a person, but their own mindset can.
Former chairperson of the Tata Group
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