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Everything you need to know about GST while starting your business

A single uniform indirect tax that replaced the myriad of other indirect taxes, and applies to all types of businesses, small or large, GST is one of the greatest tax reforms in the country.

Last Modified: 08th May, 2023

Before you can even begin operating, there are several steps and paperwork to complete for starting a business. One of the must-know topics that many novice entrepreneurs need more information on is GST: what it is and how it applies to their businesses.

Goods and Services Tax (GST) came into form in India in 2017 as a single indirect tax reform, which has replaced multiple taxes paid in the pre-GST regime. This new government tax policy makes taxation simpler and easier to understand. It allows small businesses to save a lot of time and money by keeping accurate records of their outgoing payments for goods or services over a specific value.

 

History of GST in India and when it came into action?

Former Prime Minister Atal Bihari Vajpayee proposed the GST idea in 2002. A committee was set up at that time to discuss the matter. In 2004, Kelkar Task Force on Fiscal Responsibility and Budget Management fully integrated GST in the country. The Union Finance Minister announced the launching date as April 1, 2010. However, with the lack of political consensus, the starting date fluctuated. On March 29, 2017, Lok Sabha passed the GST Bill, 2017; IGST Bill,2017; UTGST and SGST Bill, 2017; and GST (Compensation to Cess) Bill, 2017. 

On September 16, 2016, the Indian government issued several notifications to effect GST in all sections of CAB. It rolls out the GST working system by an outer time limit of one year till 15.09.2017, bringing the GST into effect. 

 

Introduction to Goods and Service Tax (GST)

It is a value-added tax from consumers when purchasing goods or services. All businesses with an annual turnover of over 20 lakhs must register for GST. This revolutionary move has made it easier for businesses to pay taxes, providing uniformity nationwide and making compliance more straightforward. 

It streamlines the taxation system by removing multiple layers of state taxes, eliminating conflict between states on interstate commerce, and ensuring higher revenue collection. It widens the tax net by encouraging small businesses to register, increasing government revenues.

 

Different Components of GST in India

  • CGST- The central government levies CGST on all intrastate transactions. It comes with SGST or UGST, where the accumulated revenue is shared equally between the center and states. 
  • SGST: The state government levies this tax on goods and services on intra-state transactions. It takes place with the revenue collected by the state government. This tax subsumes purchase of purchase, luxury, or VAT. 
  • UTGST: For all union territories like Chandigarh, Puducherry, Andaman, and Nicobar Islands, UGST replaces SGST. 
  • IGST: When goods and service transactions handle inter-state, then IGST is levied on them. It takes control of import or export services. Revenue from this tax is collected between the center and state governments. 

 

Benefits of registering for GST

Registering for GST provides businesses of all sizes with certain advantages. 

  • It simplifies the tax system and gives businesses a single taxation platform to process transactions.
  • Registering for GST can bring clarity and accountability to your business transactions, requiring businesses to report their obligations on time and in full.
  • It gives you access to benefits such as claiming input tax credits on purchases, additional marketplace credibility, and access to various Government subsidy schemes designed to offer support to small businesses.

 

Understanding eligibility criteria

  • GST registration is a requirement for certain entities, including businesses with a turnover exceeding the threshold of Rs. 40 lakhs, Rs. 20 lakhs, or Rs. 10 lakhs, depending on the case
  • Casual taxable persons/non-resident taxable persons
  • Agents of a supplier and input service distributor
  • Persons supplying via an e-commerce aggregator
  • Every e-commerce aggregator and those supplying online information and database access from outside India to individuals in India, excluding registered taxable persons

 

Documents required for GST Registration

  • PAN and Aadhaar cards
  • Proof of business registration or incorporation certificate
  • Identity and address proof with photographs of the promoters/directors
  • Address proof of the place of business
  • Bank account statement/cancelled cheque
  • A digital signature
  • Letter of authorization/board resolution for authorized signatory 

Failure to obtain valid GST registration may result in penalties ranging from 10% (minimum amounting to Rs. 10000) to 100% of the tax due if evasion has been deliberate.

 

The different tax rates

Under the Goods and Services Tax (GST), there are five different tax rates: 0%, 5%, 12%, 18%, and 28%. All goods and services in India, excluding some exempted items such as petroleum products, liquor for human consumption, electricity, and real estate, are subject to GST. 

The applicable GST rate depends on the type of product/service being supplied. Small businesses with an annual turnover of below 20 lakhs (1 crore) do not need to register for GST. 

However, they can opt to register if they choose. GST rate slabs are regularly evaluated by the government depending on the economic activities in India.

 

Allowing Input Tax Credit (ITC)

It allows businesses to reduce their tax burden by offsetting the taxes paid on inputs against the taxes collected on sales. It simplifies GST compliance, encourages competition, reduces business compliance costs, and helps eliminate cascading taxes on goods. 

The ITC provision supports the government's Make in India agenda by incentivizing the industry to use resources better and become more competitive. As a result of this policy, companies have seen significant reductions in production costs and improved cash flow by increasing efficiency and reducing wastage.

 

Understanding the rules & regulations

A business must know the tax rates applicable to different kinds of products and services, understand which taxes are allowed as set-offs, keep track of input tax credits, calculate taxes on exports, etc. 

Further knowledge is needed for specific purchases, such as backward integration and import supplies. In some cases, compliance with dual GST requires filing tax returns for both the Centre and states separately. 

Therefore, businesses should regularly update themselves on the latest developments to avoid any legal implications from non-compliance.

 

Filing & paying taxes on time

Businesses must ensure that they are registered with the government and that all applicable taxes are regularly filed and paid as required. 

Businesses must also consider any input tax credits or sets-off, assess the taxability of all supplies, collect prices from customers based on their GSTN registration, etc. All these processes should be completed accurately with clear documentation to avoid scrutiny.

 

Managing your GST account & records

Managing your GST account and records is important because it will help you track your income and expenses, help file accurate returns, and keep you compliant with the relevant taxation authorities. 

Keeping accurate GST records can also reduce operating costs because errors are avoided due to better data accuracy. It allows you to keep track of cash flows and ensure that all business payments have been correctly accounted for. Managing your GST account is a beneficial process that can save time and money.

 

Guidelines for filing returns 

A GST return is a document required to be filed with tax administrative authorities and includes details of income/sales and expenses/purchases for each GSTIN. 

Registered dealers under GST are legally obliged to file GST returns, which cover purchases, sales, output GST (on sales), and input tax credit (GST paid on purchases).
Taxpayers with sales of up to Rs.5 crore can opt for the Quarterly Return Monthly Payment (QRMP) scheme, which entails filing 9 GSTR returns each year comprising 4 GSTR-1 and GSTR-3B returns and an annual return. 
Even though those under the QRMP scheme file quarterly, monthly tax payment is required.

For each GST return, a corresponding prescribed format must be submitted through the GST portal.

 

Penalty for filing returns

Taxpayers will be liable for payment of interest and late fees. 

Interest is to be calculated at a rate of 18% per annum on the total amount outstanding from the day following the expiration of the filing date until the date of payment. Late fees of Rs. 100 per day per act is applicable, ie. CGST and SGST total Rs.200 per day, subject to a maximum late fee cap as revised from June 2021 – Rs.5,000.

In conclusion, GST has been a massive success in India. It has simplified taxes and improved compliance and transparency in the taxation system. GST will ultimately increase efficiency, reduce costs, and promote investment in the country which would benefit everyone. However, some countries have pointed out some drawbacks related to its implementation and argued that it is a complex tax system.

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