Tax Implications for Small Businesses in Specific Industries

Taxes are one of the biggest hurdles for both small and medium-sized businesses. It stops a company from reinvesting the profits into their business employees and competing for a bigger market share. Instead, taxes act as a burden for all businesses across all industries. Previously, there were different types of taxes imposed on the companies on the same product, which led to confusion and higher administrative costs. 

To tackle various challenges, the government has introduced the concept of Goods and Services Tax (GST), which has brought many changes in business across multiple industries. In this article, we have covered all the possible tax implications for small businesses in specific industries. If you also want to know more about them to manage your existing business better or start a new one with complete knowledge, this is surely the place you won’t regret. Without any delay, let’s begin the guide !! 

GST Implications for Small Businesses in the Textile Industry

The textile industry contains various small and medium-sized businesses in India. In fact, the country exports around 10% of its total annual exports from this sector only, and it will even increase after the implementation of GST. This new compliance has made various changes in the entire cotton value chain of the textile industry. It includes garments like shirts, sarees, shoes, trousers, and all for both men and women. 

Before the GST, there used to be different types of taxes available, including Value Added Tax (VAT), Customs Duty, Entry Tax, Excise Duty, and more. GST (Goods and Services Tax) has created a single system that has made the tax filing processes a lot simpler and easier. It has saved all taxpayers from the hassle of managing multiple taxes. Below, we have mentioned the major GST implications for small businesses in the textile industry. 

1. Break in Input Credit Chain

The Indian textile industry is significantly operated under the unorganized sector and composition scheme. It directly creates a gap in the input tax credit flow. Under GST, you can not claim the input tax credit if you have obtained the inputs from the unorganized sector or composition scheme taxpayer. This “break in input” of GST has been implemented to create a smooth input tax credit system and shift the entire industry towards the organized sector. 

2. Reduce Compliance Burden 

In the pre-GST era, small or medium businesses had to take the help of different agencies for managing different types of taxes, including Excise Duty, VAT, OCTROI, etc. Now, GST has summed up all the taxes into one and significantly reduced a compliance burden from the shoulders of business owners. It allows the traders to focus more on expanding their business without having to worry about compliance activities. 

3. Lower Production Cost 

GST has significantly impacted the input costs incurred in the garment industry by submitting different taxes into one. For instance, the Excise Duty and Value Added Tax used to be differently imposed on the yarn and branded garments and it directly increased the cost of the final products. Plus, these taxes also used to be different from state to state. Here, the GST has introduced uniformity and simplification in the taxation system, which reduced the input cost, which has eventually reduced the manufacturing cost in the textile industry. 

4. Job Worker Status Under GST 

In the textile industry, businesses often implement the job-work phenomena to process goods. Under GST compliance, this is considered as the supply of service to the workers. They have to register this process under the GST and discharge tax liability based on how much turnover they have generated. The rate of GST over job-work in the textile industry has even reduced from 18% to 5%. It has been implemented to make sure that compliance doesn’t significantly impact the job worker. 

5. Input Tax Credit Allowed on Capital Goods 

The import cost of obtaining and implementing the new technologies for the production of textile goods is highly expensive for now. Because the excuse paid is not allowed as an input tax credit, under the GST, you will be allowed to claim the input tax credit on capital goods. 

GST Implications for Small Businesses in the Pharmaceutical Industry

Goods and Service Tax (GST) has widely impacted the entire Pharmaceutical Industry in India. GST compliance has subsumed various types of central or state taxes into a single streamlined tax system structure. It has also eliminated the cascading effect. For instance, small businesses used to bear various types of taxes, including excise duty, service tax, and value-added tax, over a single product before the implementation of GST. It has also helped the businesses by reducing the compliance burdens and administrative complexities.  

When there was no GST, the taxes used to vary from state to state. Thus, it has led many businesses to set up their warehouses in the states with low tax rates or to take advantage of certain exemptions and state schemes. Now, when the entire taxation system is uniform under the GST, companies can establish their warehouses more strategically across the country. As they only have to pay the Integrated Goods and Services Tax (IGST) for the interstate supply of goods and services. 

Moreover, the GST has also allowed pharmaceutical businesses to claim the input tax credit. It allows companies to save their costs by offsetting their taxes paid on the raw materials and services against the final tax liability they incurred. However, GST has certain rules and regulations that every business has to follow; otherwise, it might result in legal penalties and punishments. Businesses have to invest in various types of resources to thoroughly understand the accounting and billing system required in the GST. It might also need you to train your employees, update the software, and stay informed regarding any upcoming amendments related to the GST framework.   

GST Tax Rates on Medicines and Medical Goods 

GST Implications for Small Businesses in the Food and Beverage Industry

Before directly understanding the implications of GST, we should have a look at the pre-GST scenarios in the food and beverage industry. Restaurants used to impose various types of taxes on the food value. It typically includes the VAT, Service Tax, or Service Charge. 

• VAT (Value Added Tax): The tax used to be charged over the food portion of the bill. 
• Service Tax: It was a pre-decided charge by the government for the services provided by restaurants and hotels. 
• Service Charge: Firstly, this is not any type of tax but a charge generally imposed by restaurants and hotels to the customers. It is an extra income for the businesses to collect from the consumers. 

It was a mess for the businesses to manage various types of taxes and hire separate professionals for them. GST has been implemented to remove multiple taxes and streamline them into a unified tax system. This heavy change has come up with various types of positive and negative changes for small businesses.

In the pre-GST era, small businesses had to bear various tax liabilities at every stage of the supply chain, which increased the overall tax liabilities for the businesses. Now, GST makes sure that taxes should be imposed on businesses only when a value addition occurs. It will allow the companies to have a simplified tax structure and reduce their overall tax burden. Hence, it allows the business to have more straightforward tax systems and focus on its business expansion. 

However, GST has various regulations that include strict record keeping, timely returns filing, and many others. In fact, this new taxation system has a great involvement in utilizing the technology in the accounting and invoicing system. It would require small businesses to invest more in smart software and other resources after the GST implications of foods and beverages have been divided upon the different tax slabs that we have mentioned in the next section.   

New GST Rules for Restaurants  

As per new rules, restaurants have to fall under either a 5% GST rate (with no ITC allowed) or an 18% GST rate (with ITC allowed). The GST rates vary based on various factors, including location and more. Below, we have specifically mentioned all the GST rules for restaurants and hotels. 

GST Implications for Small Businesses in the IT and Software Industry

The IT and software industry comprises millions of employees and is a significant contributor to India’s GDP. Goods and Services Tax (GST) has impacted the whole industry and its related business with positive and negative outcomes. In the previous tax regime, businesses had to pay different taxes, including excise duty, service tax, VAT, etc. Whenever a company sells software, they have to bear three different types of taxes. 

GST has levied 18% straight taxes over any transaction in the IT and Software sector. It has resulted in increased administrative and infrastructure costs for all types of businesses. At the same time, companies also get the benefits if they avail ITC to reduce the overall cost at some point. Below, we have mentioned the exact impact seen over the MSMEs of the GST. 

1. Simplify the Taxation System 

In the pre-GST era, companies and businesses used to pay 5% VAT, 15% service tax, and various uneven customs charges and excise duties. The GST implementation has simplified the entire tax structure, as it consists of a list of goods and services clearly mentioned under the tax slab.

However, the retailers are also allowed to claim for the ITC (Input Tax Credit) over the taxes paid by the buyers. For example, if a retail business owner has purchased a product at Rs.110 (GST included), then he can sell it for Rs.160. Here, you can suppose the customer is paying the taxes of Rs.15, so the business owner can pay Rs.10 and only need to pay Rs.5 to the government. In this way, they can cut out a lot of expenses. Let’s understand it more thoroughly in the next point. 

2. Avail ITC 

When the business faces higher infrastructure and overhead costs, it can claim the ITC benefits under GST compliance. As per the old regimes, the businesses (paying output VAT) were unable to claim the service tax paid on the Annual Maintenance Services (AMCs) over the company’s computers and software. However, GST allows them to claim for the ITC here. Let’s understand it thoroughly through a table. 

3. Redesigning Business Software 

Most of the IT and Software businesses use the ERP (Enterprise Resource Planning ) software. Now, the entire software has to be updated with the new GST rules and compliances. In the redesigning process, the business owners have to deal with the complexities of the GST. Moreover, businesses can also adopt a whole new software, totally following the new tax regime. 

4. E-Commerce Businesses 

GST on the IT sector makes the ecommerce business owners pay taxes no matter what their yearly turnover. It will reduce the profit margins of small businesses even during the initial phase, instead of the fact that profit margins are already very low in the initial period. Moreover, GST has directly increased the administrative and management costs for e-commerce businesses. However, it also allows smaller e-commerce businesses to claim the ITC. 

5. Compliance and Multi-factor Taxation

In the previous tax regime, a single administration controlled the IT services with a single point of taxation, that is, central service tax. However, the GST model has 111 points of taxation, as the service centers of the IT sector are present all across the country, and each requires registration in 37 jurisdictions of 29 states, 7 union territories, and 1 central region. Plus, the IT manufacturers and customers also have to pay 3 more indirect taxes. Therefore, these 111 points of registration have made it extremely difficult for the local business based upon Information Technology to maintain their business. 

GST Implications for Small Businesses in the Tourism and Hospitality Industry

India comprises one of the largest tourism and hospitality sectors, worth $15.2 billion in 2023. It is amongst the fastest-growing business sectors in India that has been widely impacted by the introduction of the GST regime in the country in both a positive and negative manner. Before the implementation of GST, the Tourism and Hospitality industry also had to pay various taxes, including luxury tax, VAT, and service tax. 

For instance, a hotel room (whose tariff room exceeds Rs.1000) used to charge a 15% service tax. Here, you can get the 40% abatement over the tariff value that brings down the service tax effectively to 9%. Moreover, the VAT (between 12-14.5%) and luxury tax will also apply and increase the overall tax liabilities. Similarly, restaurants get the 60% abatement, which makes the effective 6% service tax, along with the VAT. However, services like social gatherings such as business seminars and weddings used to get only 30% abatement. Therefore, the cascading effect has immensely increased the overall cost in the hospitality sector. Moreover, the ITC was also not allowed.

The GST has widely changed the entire scenario of the hospitality industry by moving it toward a standard and uniform tax structure. In fact, small and medium businesses are also able to claim for the ITC (Input Tax Credit). The best part is that the implementation of GST has decreased the final cost for the customers, which has increased the business opportunities for the MSMEs in this sector. It has also increased the revenues for the governments. 

GST Rates for Hotels Based On Room Tariff (Up to 30th September 2019)

GST Rates for Hotels Based On Room Tariff (With Effect from 1st October)

Positive Impact of GST on Tourism and Hospitality Industry:

• Ease the Administrative Processes: GST has abolished various other types of taxes that result in fewer procedural steps and streamlined the simple taxation process. 
• Improved Service Quality: You would have also waited on the couch for a considerable time in the hotel at the time of checkout because your bill was being prepared. GST has included the use of technological software to get the required bill instantly while imposing the required taxes on it. Thus, it has increased the speed and, eventually, the service quality of the businesses. 
• Avail Input Tax Credit: The Tourism and Hospitality industry will also be able to take the benefit of input tax credit. The new GST regime has enabled businesses to claim it by adjusting the taxes paid for input against the output. 
• Simplified procedure: GST was mainly imposed by the government to simplify the entire taxation process. It doesn’t consist of maintaining multiple taxes at a time. Instead, it has subsumed all the taxes and makes the tax returns easy to file. 
• Increased Domestic Tourism: The GST implementation has directly increased domestic tourism, as it has increased the taxes on foreign trips. 

Negative Impact of GST on Tourism and Hospitality Industry:

• Increased Tax Rates: Under the new GST regime, the tax rate for rooms with a tariff of Rs.7500 and more is 28%. The tax rate for rooms with a tariff less than Rs.7500 is only 18%. However, previously it was only 15%. This means the rates have been increased after the implementation of GST. 
• Impact Tour Operators: GST has negatively impacted the business of tour operators in this Industry. In the previous tax system, they had to pay a single tax for transportation, accommodation, and food, but now they have to pay different taxes for each service. 
• Require More Reduction: The Indian government still needs to reduce their taxes on the tourism and hospitality industry, as it resists a lot of tourists visiting the country and eventually a loss for small businesses, as they don’t even have resources to offer additional discounts to attract customers. 
• Increased technological burden: Though GST has very clear and cohesive guidelines, they all require a technological investment from businesses. Therefore, small businesses have to bear the technological burden.

GST Implications for Small Businesses in the Education and Healthcare Industry

The Goods and Services Tax (GST) has drastically made a significant impact on the small and medium businesses operating in the Education and Healthcare industry. In the education industry, small businesses, including coaching centers, have to bear with various rules and regulations of GST. Though it has eliminated different types of taxes and streamlined the taxation system to a single tax system, it has also increased the complexities for small businesses in terms of GST filing, invoicing, and compliance. 

Many types of education services are exempted from GST, while certain exceptions are here, such as coaching centers for competitive exams. Thus, education businesses have to be more careful while choosing their Industry, as it can either lead them to tax exemptions or tax liabilities. Here, the classification becomes a little challenging, especially for small businesses. 

Similarly, healthcare industries have also widely impacted the implementation of GST in India. Small businesses such as md3idal clinics, diagnostic center, etc., has to deal with various compliances of GST. Previously, the healthcare sector was completely exempt from the service tax. After the GST, businesses have to classify their business more accurately to get determined for any applicable taxes. 

Moreover, the goods and services procurement in this Industry will also subject the business to bear the GST. It might include buying medical equipment and study materials. Therefore, it is even more crucial for small businesses to claim input tax credits and follow all the guidelines of GST; otherwise, you would have to face legal penalties or punishments. Though GST has been implemented to unify the Indian taxation system, it has simultaneously brought various challenges for them as well. In simple words, the implementation of GST has brought a learning curve for all businesses. 

Gist of Taxability and Exemptions Under GST on Education Services 

Healthcare Services Classification Under GST With SAC Code 

Wrapping Up !! 

In all the business industries, GST has eliminated the cascading effect. Instead, it has to lead the country to a more simplified and unified taxation system. Though certain industries are paying more taxes now, they have very simple and quick ways of tax filing, invoicing, etc. In simple words, GST is going to make India utilize its technological powers to ease tax filing. We hope this guide helps you thoroughly understand the GST implications on each industry specifically. 

Prarabdh Gupta Freelance Content Writer & Strategist

Prarabdh Gupta is a finance content writer with 4+ Years of Industry experience in simplifying complex finance terms. He crafts captivating and engaging content around mutual funds, insurance, banking, real estate, taxation, and financial planning. He has completed his graduation from Jiwaji University, Gwalior.

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