7 Mistakes to avoid by MSME and Startups under Proposed GST Regime

This Article was originally published on Huffingtonpost.in

"It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change."

Leon C Megginson

Introduction

If you are still thinking that GST is necessary for you or not, then you must think twice. After presidential assent on 8th September 2016, GST is now a reality. Further, it is important to plan in advance for this biggest reform since independence. Mark my words; GST will have an impact on every individual of the nation. 

 

Why this article for MSME and Startups?

In this article, we will discuss the impact of GST on small business and startups with turnover up to 50 Lakh. GST has a concept of composition scheme, where one has to pay tax @ 1 or 2% on the total turnover with lesser compliances.

The concept of composition scheme is to help small enterprises and startups to help reduce the compliance cost and to provide ease of doing business.

However, under GST, the composition system is pretty technical and believe, even a small mistake can cost you lakh of rupee penalty. So, read the article carefully.

Seven mistakes to avoid if you are covered under GST regime:

 

#Mistake 1 – Making any interstate Purchase/Sale:

Suppose, you are having a turnover of 40 lakh and paying taxes @ 1% i.e. 40,000/-. You make interstate purchases of 1,000/- from a registered supplier. Now, one cannot realize how much this Rs.1000 purchases will cost him.

As per law, composition benefit will cease and the person will be liable for the standard tax rate, e.g. 20%. Now, the tax required to be paid shall be:

Tax at standard rate: 8 Lakh

Penalty of equivalent amount: 8 Lakh

In total, it will be minimum 16 Lakh, which will further increase by late fees on non-filing of returns. This will cost an assessee around 20 Lakh.

So, be very proactive and take every precaution. Otherwise, it will be tough for a small business as well.

 

#Mistake 2 - Not Seeking Permission:

If you want to avail the benefit of composition scheme, i.e. lower tax rate and lesser compliance, then you should first apply for it. Also, once applied, you cannot change the process during the year. You can only choose to avail or not to avail the benefit at the beginning of the year and after that to continue throughout the years.

 

#Mistake 3 – Not for Casual registration:

Many times, people start their business just by taking the local registration like Shop and establishment, Service tax and in future, they will apply for GST.

As per law, they are not mandatorily covered under GST and hence, they are not liable for the composite scheme. So, startups looking for the easy option under GST, we have bad news for you.

 

#Mistake 4 – Be careful Freebies:

The limit for composition scheme is 50 Lakh. Anything over and above 50 Lakh is taxed at the standard rate. Now, let us understand this by way of example:

Suppose the total supply made during the year is 48 Lakh

And you also provide some goods and services for free to your family worth Rupees 4 Lakh. So, as per your calculation, you sales figure will be Rs.48 Lakh. But as per government and law, it will be INR 52 Lakh. Hence the following consequences will follow:

• You will cease to cover under composition scheme.

• You will be liable to pay taxes at standard rate will penalty of equivalent taxes

• You will be in default for non-filing the returns and levied with a maximum penalty of INR 5,000 per return.

Hence, your little ignorance can be detrimental to your business.

 

#Mistake 5 – The Reverse Charge Mechanism:

Under GST, there is a concept of reverse charge, i.e. opposite to regular charge. The basic rule under GST is that person who is a supplier of goods and services will be liable to pay to the government.

Totally opposite to the basic rule, government notifies some cases where the recipient of goods or services will be liable to pay taxes.

Hence, even the person covered under composition will be liable to pay taxes at the standard rate and not at a discounted composite rate of 1%. Further, this will only add to their cost, as they cannot claim it as input tax credit.

 

#Mistake 6 – Not filing returns on time:

Earlier, many startups or businesses either don’t file their returns on time or not file at all. However, the government was also least bothered about it. But, now there will be a complete transformation. One will have to file a return on time to avoid the late fees and fines.

There is a late fees penalty of INR 100 per day subject to a maximum of INR 5,000/-per return.

 

#Mistake 7 – Claiming Input Tax Credit:

The primary condition of availing the benefit of composition scheme is that no input credit will be available. However, still, this is a lesser known fact and hence, tends to create a problem for the business later on.

 

The bottom line: This is not an end

Things are changing very fast, and anyone who is not responsive to change will suffer. GST will bring complete transformation and hence, one should get prepared for it. In this current article, we have only discussed one section, just thing about the whole new GST law, very different and complex. So, don’t wait till the GST to implement fully, rather start your work and go and win the world.

If you have any query regarding Goods and Service Tax (GST), click here.