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Startups: A Mixed Bag

Irregular and double taxation hiccups could still persist

There is no doubt that the GST is set to impact the startup sector. In fact, the unified tax regime has the potential to  improve the ease of doing business index for startups, but, at the same time, it is subject to layers of accounting, bound to affect the business strategy.

GST is going to be a mixed bag for the startup industry. For starters, it will boost the current VAT structure, which says that any business with an annual turnover of more than Rs 5 lakh has to get VAT registration and pay VAT (figures vary from state to state). Under GST, this threshold is increased to Rs 20 lakh thus exempting many small businesses including startups.

However, Archit Gupta, Founder & CEO, ClearTax, points out that startups in the manufacturing sector will suffer. “Excise law says manufacturing business with a turnover of more than Rs 1.50 crore has to pay excise. However, with GST, the turnover limit will be reduced to Rs 20 lakh, thus increasing the tax burden for many manufacturing startups.”

Gupta also feels that e-commerce is facing significant challenges since they need to make sure all their suppliers are GST registered irrespective of their threshold. “Non e-commerce startups who are small and pre-revenue are still trying to understand implications. The large startups have been bracing for the changes. But the major concern, as of now, for a large number of startups is figuring out a compliant billing system,” says Gupta.

In terms of the level of preparedness, Shashank Dixit, founder & CEO of cloud-based business software provider Deskera, says that the enterprises would require an enterprise resource planning (ERP) system to capture accounting and other data. “Companies also need to understand how an inventory is treated. Although GST has provisions to manage inventory better, this will involve a lot of structural changes,” he says.

Many startups feel that the system will not completely eliminate the irregular and double taxation problem as the implementation might lead to losing the economic independence of the states. Vaibhav Agrawal, Head of Research & ARQ, Angel Broking, says that despite the huge potential for emerging startups, there is a need to align their business priorities to harness maximum from the policy laid out in favour of them. “There is a lack of understanding of business models among the lower level officers and this might create hurdles for startups,” says Agrawal.

Rahul Garg, Founder & CEO of Moglix, a Ratan Tata-backed B2B e-commerce marketplace catering to manufacturing and industrial sector, is of the opinion that a majority of the SMEs are still figuring out the dynamics to become compliant to the new tax regime and will take 3-4 months to be completely ready. “The migration may come as a challenge to SMEs in terms of costs and other resources such as technology and people. Not many businesses are clear of the technology required to become GST ready, which may add to the anxiety,” says Garg. Other hiccups could revolve around reporting such as invoice matching, non-availability of input credits (if vendors have not paid their taxes) and documentation processes. There could be an additional cost and overhead of compliance going forward and also an impact on the working capital of small companies.

So, whether the business is big or small, India’s startups should be prepared to brace for the changing regime.

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