GST: A Closer Look for MSMES & Startups

Abhishek A Rastogi, Partner, Khaitan & Co. Headquartered in Mumbai, Khaitan & Co. is one of India’s oldest and full service law firms that comprises of 480+ fee earners and consultants including 104 Partners and Directors, catering to businesses across Banking & Finance, Capital Markets, Competition/Antitrust, Dispute Resolution, Energy, Infrastructure & Resources, Hospitality, Real Estate, Media & Telecom, and many other industries.

The introduction of GST marks a tectonic shift in the indirect tax landscape of India. The ambitious tax reform which was conceived with the setting up of empowered committee by the Vajpayee government more than a decade and half ago, despite some skepticism regarding the announced deadline, is nearing its implementation date. The gala over the one nation one tax regime is only dimmed, if only slightly, by the lack of time to prepare for the transition from the current regime to the GST regime.

The biggest policy reform in the history of independent India has also provided room for speculation and analysis of its impact on the market and the constituent entities. The companies, from startup to big conglomerates are all looking forward to the finalization of tax rates to undertake an impact assessment on their operations. The uncertainty regarding the applicable rate is nightmarish considering the revenues are directly aligned
with their pricing policy and the consequent competitiveness in the market.

Nevertheless, there are a host of factors which can affect businesses.Input tax credit is a factor which will be crucial for SMEs, startups and big companies alike and with the credit being allowed even for inputs used in furtherance of business, the benefits seem encouraging. The seamless availability of credit coupled with the cost of compliance will determine the competitiveness of businesses. However, the requirement to match the supplier and buyer invoices and timely compliance by the suppliers would be the prerequisites to avail such input tax credit. This will be relevant for MSMEs as they will have to adopt a disciplined approach to maximize the credit and ensure seamless credit flows. This may be challenging as the transition to formal channel and preparedness for GST will not be devoid of glitches. Here, the bigger corporations will benefit from scales, especially in terms of their readiness for the tax reform. The startups on the other hand are likely to be at a disadvantage as the transition will be challenging for them.

The requirement to match the supplier and buyer invoices and timely compliance by the suppliers would be the prerequisites to avail input tax credit

Other crucial factor is taxability of stock transfers, as the levy of tax is on 'supply' which would include transfers.The introduction of the definition of distinct person has resulted in bringing stock transfers between the branches into the taxable category. So, the stock transfer will be liable to tax. This again, will adversely affect the cash flows of the businesses and the impact would be more on the SMEs and start-ups which will face issues of working capital due to increased tax incidence. Accordingly, the companies will have to consolidate their operations to minimize tax incidence.

Further, the lower rates of composition levy are a welcome move, especially for SMEs. However, overall the companies across scales will have to adapt to the new system and work towards a smooth transition process. This will involve revisiting the existing contracts, consolidation, setting up systems for compliances, use of transitional provisions for claiming credits as on the implementation date and passing on the benefits of changed tax rates and credits to the consumers.