Breaking down GST for small-business owners

It is crucial for small businesses to understand the rates, benefits, and subsidies surrounding GST compliance

In December 2020, when Palakkad-based Bindu Nair was launching an e-commerce website for her sustainable fashion label Ela India, the Coronavirus pandemic was showing no signs of abating. A few months earlier, Kerala had laid down stringent rules for its residents and business owners to contain the spread of COVID-19.In spite of these limitations, Nair managed to register for GST—or Goods and Services Tax—a crucial requirement  for businesses that wanted to sell their goods online.

While GST compliance is one aspect, having a GST registration meant that Nair could now also tap into institutional buyers who would prefer tax-compliant vendors. Her brand is currently looking to launch a décor catalogue to cater to architects and interior designers. “When you work with institutional buyers or firms, they want that input credit. For a lot of small businesses, more than selling directly to the consumer, it’s the institutional sales that keep the business up and running.  It also gives us a fair amount of credibility to help scale up,” she says. 

This was also true of Meha Agrawal, a Mumbai-based pastry chef and founder of The Big Apple Baking Co and ice-cream brand MeeMee’s. “In 2019, even though I wasn’t touching the ₹ 20 lakh annual revenue figure needed to be GST-compliant, I voluntarily opted for it because it opened up opportunities in terms of institutional clients,” she says. Additionally, being GST-compliant has also brought in better systems, from streamlining vendors to invoicing. 

The Goods and Services Tax which came into force on 1 July 2017 in India is an indirect tax imposed on the supply of goods and services in the country. It has replaced several indirect taxes such as VAT, service tax, and excise duty, thus streamlining the taxation system. It has further improved efficiency, transparency, and simplicity in business operations.

There has been a marked rise in the number of entrepreneurs and businesses that have opted to be GST-compliant. At present, there are 1.4 crore registered taxpayers in the country under the GST law. In the fiscal year 2023-24, the government’s average monthly GST collection has surged to ₹ 1.67 lakh crore, highlighting the extensive growth in taxpayer numbers and GST revenue since its implementation, according to Saloni Roy, partner, Deloitte India.

While there are many benefits that come along with GST compliance such as credibility, access to a wider base of clients, and eligibility for loans, it is critical to do your homework on what rules apply to you and also find someone who is qualified to ensure that you access the benefits or subsidies available to you, shares Nair. “In a business like ours it is important to understand the tax slabs to plan our business better. For instance, a handloom saree, a tote bag or a stole will attract a GST rate of five per cent, while a ready-to-wear garment such as a shirt or dress will attract a 12 per cent rate,” she says.  

The Established speaks with Roy to decode the concept of GST and what it means for small-business owners. Edited excerpts. 

What is GST?

Goods and Services Tax (GST) is an indirect tax applicable on the supply of goods and services in India. In the case of intra-state supplies, Central GST (CGST) and State GST (SGST) are applicable, whereas Integrated GST (IGST) is applicable on inter-state supplies. 

Prior to the implementation of GST in India, each state government had its own laws to levy Value Added Tax (VAT) / Central Sales Tax (CST) on the supply of goods, while the Central Government imposed central excise and service tax on manufacturing of goods and provision of services. The levying of taxes at different stages of the supply chain would lead to a cascading effect, resulting in a tax burden for consumers.

In many ways, the imposition of GST has simplified the tax structure. The GST law has provided significant advantages such as an ability to take credit and a reduction in overall tax compliances. Moreover, GST operates through an online portal, enabling tax payers to conveniently file returns and pay taxes electronically.

When is GST applicable to your business?

Any individual who is engaged in the supply of goods and services is required to obtain a GST registration if their annual sales exceed ₹ 20 lakh (₹  10 lakh in the case of north-eastern states). Additionally, the GST law mandates compulsory registration for sellers supplying goods or services interstate in India or through online shopping platforms.

Even though the GST law provides criteria for mandatorily obtaining a GST registration, a person can also obtain voluntary GST registration.

What are the GST rate slabs?

GST rates are categorised into multiple slabs to ensure a fair and balanced tax system. Typically, luxury items attract higher rates, while necessities have lower rates. The GST regime in India classifies goods and services into five main slabs:

1) 0 per cent: Applicable to essential items like food grains, fruits, vegetables, fish, eggs and meat.

2) 5 per cent: Imposed on necessities such as life-saving drugs and clothing below a certain value.

3) 12 per cent: Levied on items like non-essential clothing, mobile phones and business-class air tickets.

4) 18 per cent: Considered as the standard rate, it is applied on goods (electronics, beauty products) and services (telecom, management consulting).

5) 28 per cent: For luxury items like personal care items, cars and five-star hotel stays .

The aforementioned GST rates are commonly used; however, there are other GST rates (3 per cent and 0.25 per cent), primarily for goods such as gold and precious stones. Moreover, the GST law provides an option to small businesses with a turnover below a certain limit to opt for composition schemes with a fixed tax rate, i.e. 1 per cent, 5 per cent, and 6 per cent on their turnover. In addition to GST, the GST law provides to levy compensation cess on certain items (motor vehicles, aircraft, citrates) and may range up to 22 per cent.

Should you opt for a composition scheme?

The composition scheme is a simplified option under the GST law for taxpayers having an annual turnover of less than ₹ 1.5 crores (₹  75 lakh in the case of  north-eastern states). Businesses registered under this scheme have to pay a fixed rate of GST on their turnover and file quarterly returns.

The option of availing the composition scheme is only in the case of certain supplies and not available to persons making inter-state supplies or selling goods through an e-commerce operator. Moreover, a composition dealer cannot avail the input tax credit on purchases or pass on the GST credit while selling goods to the registered person.

Therefore, before registering as a composition dealer, one has to understand the nature of supply (whether eligible to opt for a composition scheme) and understand the customer base (register business, inter-state sale, or sale through e-commerce operators).

Overall, the composition scheme is advantageous for small businesses seeking to simplify GST compliance and potentially reduce their tax burden. However, businesses that pay significant taxes on purchases or operate across states should opt for a normal GST registration.

How can registering for GST help your business?

Having a GST registration gives businesses an edge, especially in today's environment where corporates prefer working with tax-compliant vendors to mitigate any potential tax concerns.A GST registration can also assist a business in obtaining loans. It is a strategic decision as it offers small businesses  advantages for growth, compliance, and market access. A registered business can utilise the GST paid on purchases to offset GST liability on sales, effectively reducing the overall tax burden.

How can you simplify the  invoicing procedure?

Small businesses can streamline their invoicing process by embracing technology and staying organised. They can create invoice templates and centralise all business data, including customer information, product details, and tax rates for easy access. Additionally, if the total turnover exceeds ₹ 5 crores in any preceding financial year, businesses are mandated to generate e-invoices. Businesses can also use an accounting software that automates the customer information, tax calculations, and invoice generation.

What are the key points to keep in mind with GST?

a.GST registrations: A person must register under the GST law within 30 days if their yearly sales exceed the threshold limit, as failing to do so may result in penalties.

b.Filing GST returns: A registered person must file GST returns electronically, such as GSTR-1 and GSTR-3B, on a monthly basis. Small businesses can opt for a composition scheme and file quarterly returns. Based on the turnover, there are annual compliances as well.

c.Outward tax liability: A registered person should charge an applicable GST rate based on the classification codes (HSN/SAC) and discharge outward liability on a monthly basis. Further, CGST and SGST need to be paid on intra-state supplies, and IGST on inter-state supplies.

d.Input Tax Credit (ITC): A registered person can claim credit of the GST paid on purchases and offset it against the outward GST liability. However, that credit is not available in the case of certain specified supplies under the law, and transactions not reported by the vendor on the GST portal.

e.Reverse Charge Mechanism (RCM): Businesses must pay GST on certain inward supplies like legal services or Goods Transport Agency services under RCM.

Do you need a GST consultant?

For new and relatively small businesses having a limited number of transactions and few GST rates, navigating the initial stages of GST can be managed using online video tutorials and accounting software. Nonetheless, seeking guidance from a GST consultant early on can help in simplifying business and compliance complexities.

Also Read: Five ways to save your tax

Also Read: The Smart Girl’s Guide to avoiding unnecessary expenses

Also Read: It is crucial for women over 25 to have conversations around money at home