"It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change."
Leon C Megginson
After presidential assent on 8 September 2016, GST is now a reality and mark my words, it will impact every individual in India. It's imperative to plan in advance for this biggest reform since independence, or you might find yourself being thrown for a loop.
In this post, we will discuss the impact of GST on small businesses and startups with a turnover of up to ₹50 lakh. Now, the GST has a concept of "composition scheme", where one has to pay tax @1 or 2% on the total turnover with fewer compliances. The idea behind the composition scheme is to help small enterprises and startups to help reduce compliance costs and to provide ease of doing business.
However, the composition system is full of technical traps and, believe me, even a small mistake can cost you lakhs of rupees in penalty. So, read the article carefully! Here are seven mistakes to avoid:
Mistake 1: Making any interstate purchase/sale
Suppose, you have a turnover of ₹40 lakh and are paying 1% taxes i.e. ₹40,000. You may make interstate purchases of ₹1000 from a registered supplier, but this might cost you more than you know.
As per law, composition benefit will cease and the person will be liable for the standard tax rate, e.g. 20%. Now, the tax required to be paid shall be:
Tax at standard rate: ₹8 lakh
Penalty of equivalent amount: ₹8 lakh
In total, it will be minimum ₹16 lakh, which will further increase due to late fees on non-filing of returns. This will cost an assessee around ₹20 lakh.
So, be very proactive and take every precaution.
Mistake 2: Not seeking permission
If you want to avail the benefits of the composition scheme, i.e. lower tax rate and lesser compliance, then you should first apply for it. Also, once applied, you cannot change the process during the year. You can only choose to avail or not to avail the benefit at the beginning of the year and after that to continue throughout the years.
Mistake 3: Casual registration
Many times, people start their business just by taking local registrations such as shop and establishment, service tax; they will apply for GST in the future they think.
As per law, they are not mandatorily covered under GST and hence, they are not liable for the composite scheme. So, startups looking for the easy option under GST, we have bad news for you.
Mistake 4: Be careful of freebies
The limit for the composition scheme is ₹50 lakh. Anything over and above ₹50 lakh is taxed at the standard rate. Now, let us understand this by way of an example:
Suppose the total supply made during the year is ₹48 lakh. And you also provide some goods and services worth ₹4 lakh to your family for free. So, while you calculate your sales figure to be ₹48 lakh, to the government and law it will be ₹52 lakh. Hence, the following consequences will follow:
- You will cease to be covered under the composition scheme.
- You will be liable to pay taxes at the standard rate.
- You will be in default for non-filing of the returns and levied with a maximum penalty of ₹5000 per return.
Mistake 5: The reverse charge mechanism
Under GST, there is a concept of reverse charge, i.e. opposite to regular charge. The basic rule under GST is that the person who is a supplier of goods and services will be liable to pay the government.
Totally opposite to the basic rule, the government notifies some cases where the recipient of goods or services will be liable to pay taxes.
Hence, even the person covered under the composition scheme will be liable to pay taxes at the standard rate and not at a discounted composite rate of 1%. Further, this will only add to their cost, as they cannot claim it as input tax credit.
Mistake 6: Not filing returns on time
Earlier, many startups or businesses didn't file their returns on time or did not do so at all. The government was also not bothered about it. But, now there will be a complete transformation. One will have to file a return on time to avoid the late fees and fines.
There is a late fees penalty of ₹100 per day subject to a maximum of ₹5000 per return.
Mistake 7: Claiming input tax credit
The primary condition of availing the benefits of the composition scheme is that no input credit will be available. However, this is a lesser known fact and hence, tends to create a problem for the business later on.
Things are changing very fast, and anyone who is not responsive to change will suffer. GST will bring about a complete transformation and one should be prepared for it. We've addressed just one aspect here, but the complexities are varied, depending on the situation. Ultimately, there is no substitute for doing your homework as the GST rolls out.