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Decoding GST: How it will impact Indian startups

Even as the government is still deliberating on the list of over 5,000 goods that will be taxed under the upcoming Goods and Services Tax (GST), Indian startups have welcomed passage of the Bill, which they feel will simplify conduct of business.

Startups believe it will simplify taxation in the long term, reduce cross-border corruption between states, and let them claim the credit on taxes paid on expenses in their companies.

Major taxes like excise duty, octroi, service tax, special additional duty and VAT (value added tax) will be subsumed into a single tax called GST, which likely to be applicable from July 1, 2017 onwards.

“In the short-term, it may increase compliance as sellers would have to file a return thrice in a month, compared to once in six months, at present,” said Navin K Rungta, co-founder of eLagaan. “Sellers would have to report their monthly sales by the 10th of each month, purchases by the 15th and a consolidated statement by the 25th of each month,” said Rungta.

“Sellers would have to report their monthly sales by the 10th of each month, purchases by the 15th and a consolidated statement by the 25th of each month,” said Rungta.

This might increase compliance in the short term as software to automate all such processes are still being built. Startups which provide services will also benefit from the service tax exemption limit has been raised to Rs 20 lakh from Rs 10 lakh earlier.

Grocery retailing startups have also welcomed the passage of GST Bill. “The government has allowed 100 percent FDI in food retailing. When that comes through, we have a lot of service tax credit. That service tax credit will get converted into GST credit. Today, we are not able to offset service tax credit against anything else. That will give us a lot of tax advantage,” said Ashneer Grover, chief financial officer, Gurgaon-based Grofers.

Logistics sector to benefit

Removal of a lot of taxation bottlenecks at state borders through one tax will make India as one market. It will also reduce anomalies of the price difference of goods between states.

Taxation software startups will also get a fillip. “Many startups are into e-commerce and their logistic costs goes up with 11 categories of taxes levied on the road transport sector. GST can reduce logistic costs of companies producing non-bulk goods by as much as 20 percent,” said Mohit Bhambani, CEO of tax compliance solution firm KDK Softwares, which is developing GST compliant software.

Online marketplaces have already started educating their sellers on GST compliance. Vishal Chadha, Senior Vice President, Business at Snapdeal said, “The GST is one of the most wide-sweeping reforms launched by the government of India in the recent times, and will deeply affect how business is conducted and reported in our country.”

Snapdeal has already launched a webinar called ‘GST Guru’ to educate its sellers on the compliance on the upcoming tax.

“India has always fared badly on ease of doing business. GST will greatly work in that direction. There will be a single tax that startups will have to comply with besides reducing payment compliance etc,” said Preeti Khurana, a chartered accountant who works with Bangalore-based Cleartax.

Currently, startups in the manufacturing sector have to adhere to a lot of state regulations besides having to pay state taxes. Khurana also said that many states have a threshold beyond which startups have to register for VAT, if you had a turnover of Rs 5 lakh. Under GST the proposed threshold is Rs 20 lakh.

“Majority of the manufacturing sector is unaware of GST and its benefits. It is essential for the manufacturing units to first educate themselves and then adopt technological advancements to comply with the same," said Rahul Garg, Founder and CEO of Ratan Tata-backed marketplace Moglix.

Sellers and marketplaces divided

Online sellers are happy with the move. Startups can also offset total tax liability against tax paid on expenses such as office furniture, which was currently not possible.

“Sellers selling product at a loss will be discouraged, reducing fraud. Tax collection at source (TCS) for online marketplaces will ease business for sellers,” said a source in All India Online Vendors Association, requesting anonymity.

Marketplaces such as Amazon, Flipkart and Snapdeal have resented the 2 percent tax collection at source (TCS), saying that sellers should be required to pay this tax.

“None of us is saying GST is bad. It's going to be good for the country. Our capital will be locked in the system (with TCS) which will also affect sellers. E-commerce companies can share information (about the sellers and their sales) with state and central government who can claim taxation from them,” said Sachin Bansal, co-founder of Flipkart recently in a joint conference with heads of Snapdeal and Amazon India.

However, major benefits are expected in the movement of e-commerce goods between states. Delivery is likely to be faster and cheaper as companies will incur major boost when transportation will shift back to the road than air being used currently.

"Every state has its own taxation system. Every time a truck passes through a state border it involves heavy taxation and paperwork. Warehouse location is kept in accordance with the state taxation and amount of business from a particular area. With GST coming in the entire country will be one without any tax boundaries,” says Raghav Himatsingka, CEO and Founder, Truckola.

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