Before 2017, India and its citizens were governed under the multiple indirect tax system. This system paved deep paths towards tax evasion and avoidance. On 1st July of 2017, the Goods and Service tax laws were implemented in India for the first time. This was the breaking point for a whole new regime that governs and regulates indirect taxes on sale of goods and services in India. However, like all changes, this new law also brought a varied range of challenges in its implementation. We are here to take a deeper view at the impact of the GST laws on small businesses of India. So, let’s dive in.
Objective of GST implementation
The GST law was introduced to overcome the issues faced by tax authorities in implementing the other scattered indirect tax laws. The table below displays all the objectives with which GST was implemented in India.
| Objective of GST implementation | Details |
| Removal of Cascading Effect of Taxes | Due to the prevalence of a multiple indirect tax system, the applicability of tax rates used to cascade. Which means, if you are paying tax on a product, the total value also includes taxes paid previously. Impact of GST eliminates this cascading effect and reduces the price for the end consumer. |
| Simplification of Tax Administration | By eliminating the different indirect taxes like excise duty, sales tax, service tax, etc, the administration by authorities is simplified. With a new single system, which can be operated through a single online portal, administration of GST compliance is easier than ever before. |
| Promote Economic Integration | GST creates a uniform market for goods and services nationally. The aim of GST was to integrate the taxes and remove state wise barriers. As a result, the goods and services can be moved more freely across the country, while ensuring compliance with the GST laws. |
| Improvement in Revenue Collection | Evasion and avoidance of taxes in the old regime used to hamper effective revenue collection. However, the impact of this new GST regime is also an improvement in the revenue collection by the GST authorities. |
Fundamental Changes of the GST Regime
The basic impact of the GST laws on small businesses can be understood more easily if we know the exact changes that this new law brought forward:
Single tax system
Instead of levying various different charges, GST brought forward the concept of a single tax system for all supplies of goods and services within India.
Dual Tax Structure
There are two different types of GST categories Central GST (CGST) and State GST (SGST) applicable when trade is within one state.
Integrated Tax
On inter state supplies, ie.., supply of goods or services from one state to another, the IGST is applicable. This integrated tax is collected by the central government and distributed within the states later.
Tax Rate Slabs
The new laws also came with amendments to various tax rates. Different goods and services are bracketed in different categories of GST tax rates. Moreover, certain essential items are free from GST and luxury items have additional GST.
Also Read: Tax Implications Of The New GST Regime
The Immediate Impact of GST on Small Businesses
As evident, the GST regime brought a lot of changes to the entire tax system. These changes impacted all different industries. However, small businesses are the ones that face a lot of problems. Most of the time, small business owners are passionate entrepreneurs who want to work and grow their business. It is not necessary that they may have the understanding of taxation requirements. Moreover, small businesses also have limited resources. Hence, it may be difficult for them to implement the new GST regulations. When the law was first introduced, there were many challenges faced by these small businesses in GST implementation and compliance. Let’s take a look at these challenges.
Also Read: Importance Of GST For Small Businesses In India
Challenges faced by small businesses post – GST implementation
Compliance requirements
One big impact of GST was that it made adherence to these laws very strict. Under the new tax regime, staying compliant and filing taxes in a timely manner is of utmost importance. Besides, there are so many stages in compliance such as registration, keeping records, tax calculations, filing returns, responding to notice, etc. all of this takes a lot of time and resources. Meanwhile, small businesses anyway have a lot on their plates. This entire process can add a bit of a burden to the operations of small businesses in India.
Invoice Management
Keeping all invoices stored with accurate details is another important need of GST implementation. Moreover, there are certain rules on how an invoice should be generated and processed under the GST law. This can negatively impact a small business. Considering that the small businesses don’t have much time to spend. That’s where GST software solutions that can help with invoice management, like the CaptainBiz software can come in handy.
Limited Knowledge
Learning the new GST laws and understanding their practical aspects is burdensome for small business owners. Moreover, different GST professionals have varying interpretations of the law, which increases the confusion of the business owners.
Complications in Filing
In GST law, you need to complete all the filing requirements strictly within the deadline. The failure to do so can often lead to heavy penalties. This can get overwhelming for small business owners with access to limited resources.
Cash Flow Problems
For businesses, GST on purchase of goods is required to be paid upfront. However, the Input tax credit on the product is only received after the sale of goods. Hence, the products not sold are blocking your working capital in a way. While this may not seem significant to large enterprises, it is definitely a point to ponder upon for the small businesses.
High tax burden
Certain business sectors like small manufacturers, have a lower threshold for GST registration. With these changes, their tax burden is bound to increase.
Changing tax rates
As a part of the GST laws, there is a constant review of the tax rates applicable on various goods and services. These changes happen on the basis of market research and consumer trends. A negative impact of GST on the small businesses is that it makes it mandatory for them to stay updated about these changing rates.
For example, in the 45th GST council meeting, the GST rate applicable on Pens was increased from 12% to 18%.
Impact of GST on pricing strategies of small businesses
GST laws leave a significant impact on a lot of factors of small business, including pricing. A competitive market will make the small business owners hesitant in increasing their prices. Moreover, the delays or problems in ITC claims can also be offsetting as it further restricts the cash flow of small businesses.
Opportunities created by GST for small business
Aside from bringing in new challenges, the GST regime has also brought a lot of positive changes for small businesses. This opens new gateways for small business owners to grow. Let’s see how:
Reduced Compliance Burden
The previous regime of state specific taxes used to put a lot of unnecessary restrictions on the sale of goods and services. The new regime reduces these burdens for separate filings, etc.
Level Playing Field
By eliminating the cascading effect of taxes, the GST regime creates a level playing field for various business owners. As a result, the small businesses get an equal chance at growth with healthy competition in the market.
Input Tax Credit Claim (ITC)
When business owners purchase a raw material or any ancillary product, they pay taxes on the purchase. However, these are reimbursed to them as an ITC when the products are sold. This is a good way to reduce tax liability and overcome the cascading effect of the previous tax regime.
Transparency and Efficiency
With a very transparent regulatory system, GST eradicates the chances of corruption or any hidden costs for business owners. This gives a clear idea to small business owners about their duties towards GST compliance. Moreover, the government constantly takes measures to make the GST implementation process more effective. Resultantly, it impacts small businesses positively by giving a fair chance.
Faster movement of goods
In the old regime, Octroi charges and inter-state checkposts, etc., took up a lot of time in the delivery of goods. However, with all of those regulations eliminated, an interstate transaction of goods can happen easily. Hence, with the reduced timeline for delivery and costs, GST provides small businesses to try out the interstate supply of goods.
Warehouse Optimisation
When the complexities are removed, small businesses get a chance to manage their warehouses more effectively. Under the GST regime, these business owners can also consolidate their warehouse functions at a national level and get major benefits like cost and time savings.
GST Composition Scheme
Specifically for small businesses, the government has initiated the GST composition scheme (“Scheme”). Under this scheme, a simplified tax compliance process is given for small business owners, whose turnover is less than Rs. 1 crore. As a result, the burden of filing taxes is reduced, as the authorities eliminate a lot of unnecessary requirements for these small business owners. Under this scheme even the tax rates applicable are lower as compared to a regular GST registration.
Formalization of Business
Many small businesses are scattered. By obtaining GST registration, these business owners can easily formalise their business. Moreover, they can also obtain the benefit of various initiatives taken by the government. When a small business is compliant with the tax regulations it can easily access financial credits like loans and raising funds. Thus, creating new ways for expansion.
Adapting to GST: Practical Tips and Strategies
Thus, small business owners can get a very significant positive impact from the GST law. However, to mitigate the risks and challenges, these small businesses also need to adapt to the GST laws effectively. This can be easy if you follow the below mentioned strategies:
| Aspect | Tips to Adapt to GST | Details |
| Streamlining Compliance with Software | Invest in a GST compliant Accounting Software | Many record keeping can lead to hefty penalties due to human errors. So, if you invest in a user-friendly software, like CaptainBiz billing software, you can easily transform your business |
| Explore Free trials | Before committing to any single software solution, you should check out which ones offer free trials. Thus, you can easily check the compatibility with your operations. | |
| Training the staff | Just buying a software and setting it up is not enough. You need to ensure that your staff is trained properly and can use the software seamlessly to process your GST compliance. You can only obtain the maximum optimisation, if your staff is also properly trained. | |
| Financial planning and cash flow management | Understand your liability | Even if you are using software, you need to have a basic understanding of how your liability is calculated. For that, you need to analyse the market, industry trends, and stay up to date with the evolving tax rates for your business activities. |
| Project Cash Flow Impact | If you don’t consider the GST and ITC claim prospects in the cash flow projection, it can restrict your working capital. So, as a small business owner, you need to consider pre and post GST scenarios while making cash flow projections. | |
| Explore Financing Options | If you feel that there can be a problem with the cash flow, you can easily take a short term debt like a loan to manage your business operations without any hassle. | |
| Additional Strategies for GST adaption | Digital Record – Keeping | Keeping a digital record of all your sales and purchases, along with relevant GST invoices, can take you a long way. These documents, when preserved safely, act as an evidence in case any GST Litigation or compliance problem occurs. |
| Stay Informed | This is one of the most important strategies to ensure GST compliance for small businesses. The business owner has to be informed about its business activities, the applicable tax rates, the nitty gritties like filing deadlines and more. It’s a good thing that software solutions like CaptainBiz also offer reminders of due dates which prevents unnecessary penalties. | |
| Professional Guidance | Professionals always know better. So, if you face any trouble with a deadline, or a calculation, or even mere interpretation of the tax law, you should consider getting consultancy from a professional. | |
| Access Online Resources | The government along with other stakeholders, understand the complexities of the GST laws. Hence, they make resources available online. There are thousands of useful resources that can help you understand the GST laws with ease. Moreover, GST professionals and edtech institutions, etc. also provide webinars, seminars, e-books, and whitepapers on understanding GST laws for small business. |
Leveraging GST for Business Growth
Once you adapt to the Goods and Services Tax laws, you can easily leverage the mechanism to grow your small business. It may seem unrealistic when you are surrounded by challenges. However, once you overcome these challenges, it will be much easier to leverage GST for business growth. Here’s how:
| Aspect | Business Growth | Details |
| Competitive Advantage | Optimisation of Costs | By creating a proper strategic plan, you can use the ITC amount to reduce your overall tax burden. Moreover, when complaint, you can analyse your supply chain and see if you can reduce any tax liabilities and improve cash flow or not. |
| Efficiency | By embracing technology and automating your tasks, you can easily streamline the entire GST compliance. This saves a lot of time spent in manual invoice processing and data entry, which can now be spent on strategic aspects of the business. | |
| Transparency | When you are honest and prompt with your tax filings, it builds an image of professionalism and trust. With this enhanced brand image, you can easily attract investors, and clients alike. | |
| Expanding Market Reach | Access to National Market | Inter-state barriers are removed with the inception of GST. As a result, now even small businesses can tap into a whole new market. You can easily make interstate sales without having to worry about overhead expenses. |
| Simplified Logistics | As a result of the removal of tax barriers in interstate sales, logistics, ie., movement of goods from one place to another has also been simplified. Now, you can easily deliver your goods across the country. | |
| Other Opportunities For Business Growth | Benefits of Formalization | When you register under GST, you formalise your business under the tax regime. Now, you can opt for various incentives, while the authorities can easily keep a track on your activities. |
| Focus on value proposition | Once you analyse the pricing strategy of your business post GST compliance, you can add a unique value to your goods and justify the price adjustments accordingly. This paves a new way for growth. | |
| Supplier Relations | By being compliant with the law, you gain trust of many stakeholders, including your suppliers. By maintaining these interpersonal relationships, you can grow your business easily. |
Also Read: Benefits Of GST For Small Business
Conclusion
Nothing that’s worth having comes easy in life. When you apply this principle even in your profession, you can achieve the business success and growth you are looking for. The implementation of GST may be complex for small businesses. However, with adequate measures like trying our CaptainBiz GST billing software can help your small business adapt easily. So much so, with a short term use of the software solution, you can also leverage its technology to grow your business and streamline other operational processes. Get your free CaptainBiz trial today.
FAQs
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How does GST affect small businesses?
With a single platform for registration, any business in India can have access to the GST portal and its registration. Moreover, small businesses get a lot of benefits under the GST regime, such as the composite scheme.
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Is GST required for a small business?
If the annual turnover of your small business is more than 40 lakhs, you need GST registration. However, you can also opt for voluntary registration if your turnover hasn’t reached the threshold yet.
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How do small businesses manage GST?
Today we have digital solutions for every problem. So, to manage GST efficiently, small businesses can opt for cost effective software solutions like the CaptainBiz billing software.
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What is the GST Scheme for small business owners?
GST composition scheme is the scheme applicable to small business owners. Under this scheme, if you are eligible, you can get access to lower tax rates, simplified filing process and other benefits.
