Goods and Service Tax
With 114 countries and the European Union already implementing a central goods and services tax commonly known as the GST, India has finally followed suit. After a decade-long debate, in a historic development, the GST bill was passed in the Rajya Sabha making it a part of the Indian Constitution, specifically the 122nd Amendment. The most important feature of the GST can be explained in a single sentence: One Country, One Tax.
Now, centre and state governments will have to work in tandem, negating the arbitrary nature of taxing carried out by individual states. In addition, 30-plus markets across states and sectors will all come under the same tax framework. The proposed amendment will also bring all the various kinds of taxes such as central excise duty, service tax, VAT, central sales tax, customs duty, central surcharge, cess, octroi, luxury tax, entertainment tax, purchase tax and a few indirect taxes together under the ambit of one uniform tax structure. GST will provide a huge breather to the start-ups in the sales and service industry as GST does not distinguish between sales and services.
What does GST imply to the start-up ecosystem in India
In simple terms, the passage of the Bill will unarguably usher in the most impactful tax reform this country has seen. It will cater to the needs of the emerging digital economy of India, arguably led by the India start up revolution that seems to be underway. Additionally because the Bill exempts companies with a turnover of less than INR 10 lakhs from paying tax it will sure-fire game-changer for the start-up ecosystem. The only wrinkle in an otherwise silver lining would be for businesses, including start-ups, operating out of the Northeast, as they are still going to be taxed for generating revenue more than INR 4 lakhs. The other key benefits include an easier compliance process which allows for quicker expansion and an inter-state trade of goods and services (decided by the centre) with the concerned state levying a 1% origin tax. Most of all, all filing can be done under one tax. One would argue that in the short term, it will see some implementation challenges and cost rises – with the increase in effective tax rates from 15% to the 18-20% but long-term consolidation of all tax process will surely lead to increased profits and scalability.
Beneficiaries
Logistics, retail and automation become beneficiaries in the start-up space as they will benefit the most from GST. It is argued that more than 10% of the ecommerce and retail start-ups time in trade and transportation is spent at state/city borders due to various tax checks and penalty payments/collections. After GST, this time and cost will be reduced resulting in better routes for end users. Warehouse planning and positioning will also become much better as there won’t be a need to have many small warehouses across the states. This will unify the warehousing loads and reduce overall cost and time in end-to-end supply chain. Other sectors such as real estate are also going to indirectly benefit from the strategic move. The GST has been a long-standing request of the real estate sector that has been plagued by multiple layers of taxation. In the long term, real estate should benefit from a unified tax regime, a lesser tax burden on construction materials like cement, steel, etc. This, in turn, can lead to lower construction costs for developers, who can pass on the price benefit to home buyers.
The losers
While the startup community as a whole has come out in full support, e-commerce startups are going to struggle due to the vague definition and lack of clarity regarding aggregators versus operators. Operators do have to pay tax while aggregators need not. The Bill in its present form, however, complicates things for e-commerce marketplaces, where the onus of sellers’ compliance and tax paid on inputs is now on them. Online travel sites like Cleartrip, Yatra and MakeMyTrip, which come under the service industry purview, have enjoyed a flat 15% service tax across the board so far. With the GST bill coming into effect, this figure will see a significant increase. Implementation of GST will make traveling and booking hotels more expensive for customers as it’s pegged to go up to 22%.
It is argued that the GST seems to be very manufacturing-focussed and one is not sure if the simplification will happen for service industries. In addition to travel sites, advertising agencies might also be particularly affected as both state and centre will levy GST, increasing the burden of taxation.
Conclusion
The future definitely seems rosy for the 1.3 billion consumer market and the plethora of startups which are currently operational in the largest democracy in the world. But the long-term effects of the GST and its impact on the ecosystem still remain to be seen. We will keep watching this space as we keep exploring the course of this long-awaited tax reform.