SMEs offer goods and services. Accordingly, they are liable to pay Goods and Service Taxes to the government. Failing to file the same on time or inaccuracy in filing could subject entrepreneurs to penalties and legal repercussions.
This makes it crucial for SME owners to know more about GST and its norms. Also, having an insight into the accompanying benefits of GST could help you streamline your business operation even further.
Previously manufacturers with an annual turnover of Rs. 1.5 crore or less were not liable to pay excise duty. Currently, all manufacturers with a turnover of Rs. 20 lakh (others) or Rs. 10 lakh (Special category states) or more come under the purview of GST norms.
However, there are other factors that SME owners must find out.
The previous taxation system forces SMEs to pay tax for the same product at different production levels. For instance, SMEs had to pay Central Taxes in the forms of customs duty, excise duty, service tax, etc.) and State taxes in the forms of VAT, luxury tax, purchase tax, etc.
However, GST removed the cascading effect and simplified the taxation process. Also, GST is a value-added tax, meaning it is levied on the value addition. For instance, if the total payable GST for an SME is Rs. 600, out of which it has paid Rs. 300 on inputs, it needs to pay Rs. 300 as net GST to the Government.
Also, SMEs need not rely on multiple tax authorities depending on their business nature and transaction. They can manage their business operations and taxation process knowing the relevant authority is either the Central or the State Government.
The implementation of Goods and Service Taxes has streamlined the taxation process at several levels. For example, previously, SMEs need to separately register for excise duty, sales tax, VAT, service tax, etc. Now, it can be converted into one single GST registration. Further, if an SME is functional in multiple states, it can complete the procedure online through e-verification and online authentication.
SMEs must know that the actual payable GST is divided into SGST, CGST, and IGST, but paid through one online registration. It eliminates the need of registering under VAT in each state. Hence, SMEs can easily launch and expand their business across the country.
SMEs involved in transporting goods in other states face much trouble in the checkpoints and inter-state border. Not only do they have to wait in long queues, which increases labour and fuel costs, but also complete multiple paperwork and pay taxes at the checkpoints. This, in turn, delays the entire delivery process.
However, under the GST regime, SMEs can pay a combined tax called IGST, which comprises CGST and SGST (despite CST- Central Sales Tax). It is collected by the Central Government and withdraws border and check-post taxes. Thus, it enhances inter-state business, and minimises maintenance costs and ensures faster movement of goods.
Until GST, SMEs offering both goods and services had to calculate VAT and services tax separately. Fortunately, GST removed this gap between goods and services and introduced tax calculation on the final total, not on individual products and services.
This tax calculation method enables SMEs to benefit from tax incentives for payments of input goods and services such as interstate and local purchases, import, and telephone services.
As stated earlier, SMEs with an annual turnover of Rs. 20 lakh or Rs. 40 lakh in case of suppliers come under GST. The reason for increasing the threshold was to reduce compliance pressure on SMEs. Further, SMEs can avail benefits offered in the form of the Composite Scheme. SMEs having a turnover of less than Rs. 1.5 crore per year can register under this scheme.
However, SMEs must remember that if their business includes supplying inter-state goods, they cannot claim the benefits offered under it. Also, claiming Composite Scheme benefits frees SMEs from Input Tax Credit.
Operations (distribution and logistics) of SMEs which were previously restricted to state-level tax minimisation can now get a chance to introduce themselves in other states. SMEs must know that now they can expand their national footprint without worrying about investment volume. Both small and large SMEs can enjoy a similar business environment across the country due to the streamlined tax structure.
Now that SMEs know ample information about Goods and Service Taxes, they can easily avail benefits under its category. In general, taxes coupled with low deprecation tend to negatively impact a business's operating cash flow, widening the working capital gap. However, by availing the working capital solutions extended by KredX, small and medium enterprises can boost their cash flow and streamline operations in no time.