Research Paper Business E- -9916 | 3 | May 2017

Management

IMPACT OF GST ON INDIAN STARTUPS

ABSTRACT
GST (Goods and services tax) is being considered as one of the biggest tax reforms in India after
independence. The idea of “One nation, one tax” has been welcomed by Businessmen, Governments,
Professionals and policy makers. GST will simplify indirect taxes by integrating all major indirect taxes
like Excise duty, service tax, VAT, Octroi etc. into one single tax, thus increasing the ease of business in
India. The present paper tries to investigate the impact of GST on Indian start-ups. India is the home of the
third largest startup ecosystem and the youngest startup nation with more than 4000 startups and 80000
employments in such start- ups.

This paper tries to briefly describe the salient features of GST, its applicability and important provisions
like concept of taxable person, taxable point and composition levy scheme and a comparison of existing tax
regime with the proposed GST and their impact on manufacturers, Traders, Service providers, Importers
and Exporters. Introduction of GST will increase transparency and simplify the existing tax system, hence
reducing documentation cost and increasing the ease of business for startups but it will also lead to an
increase in effective tax rate for service providing startups and will at least increase inflation in short term.
This paper tries to consider all possible advantages and disadvantages of GST on Indian startups. In
conclusion we can say that although proposed GST act may not be completely perfect but in spite of all
these problems GST is one of the most business friendly reforms in India and in long term the benefits of
GST are likely to overcome the problems of GST.

KEYWORDS: Composition levy scheme, GST, Service providing startups, Taxable person, Taxable point.
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Management
1. INTRODUCTION
India is one of the fastest growing economies of the world. Skilled and cheap labour, growing demand and
consumption and low political and legal risk makes India one of the best places for investment. However
investors again and again have complained of the complex structure of taxation in India. Tax has been
divided into 2 parts namely Direct tax (one which is directly paid by the ultimate consumer) and Indirect tax
(one which is indirectly paid by the ultimate con- summer). There are at least 20 different types of taxes that
a new company may have to pay if they are going to start a business in India. This includes direct taxes like
Income tax, corporate tax, dividend distribution tax, securities transaction tax and indirect taxes like custom
duty, excise duty, service tax, VAT, central sales tax, entry tax and octroi etc. This leads to complexity, less
transparency and difficulty in operating business in India. So in order to increase the ease of busi- ness and
transparency, government has introduced a single “Goods and services tax” (GST) for almost all indirect
taxes.
GST is one of the biggest and most important tax reforms in India which aims to remove the tax barriers of
present tax system and create a single market for everyone. The Constitution (122nd Amendment) Bill, 2014

was passed and rati- fied by Lok Sabha and Rajya Sabha respectively for implementing GST by 1st April
2017. GST will simplify indirect taxes by integrating all major indirect taxes like Excise duty, service tax,
VAT, Octroi etc. This idea of “one nation, one tax” has received positive feedback from all stakeholders.
The present paper tries to understand the impact of proposed GST on Indian startups. This paper also tries to
find out the impact of proposed GST on manufacturer, service provider, Trader, Importer and exporter in
comparison to present tax system.
This paper is divided into 9 sections as follows. After a brief introduction about the topic in section 1, the
objectives of the study are listed down in section 2. Section 3 talks about the importance of the study in
current economic scenario. A short literature review has been provided in Section 4.Research methodology of
this paper has been discussed in section 5. In section 6, Salient feature of GST has been described. Section 7
compares present tax regime with proposed GST with focus on various stakeholders. Section 8 discusses the
positive and negative impact of proposed GST on Indian startups. Summary and conclusion of this paper is
elucidated in section 9. References used for this study are mentioned at the end of this research paper.
1. OBJECTIVES
1. To understand the process of proposed GST.
2. To compare the existing tax system with proposed GST
3. To find out the impact of GST on various stakeholders like traders, manufac- turer, service provider,
exporter and importer.
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Management
4. To ascertain the positive impact of GST on Indian Startups.
5. To ascertain the negative impact of GST on Indian Startups.
3. RATIONALE OF THE STUDY
According to NASSCOM's report on Indian Startup, India ranks 3rd among global startup ecosystem with
more than 110 incubators with a growth rate of 40% and a funding of more than 5 billion. The average age
of startup founders is just 28 yrs. which means India has one of largest pool of young aspiring entrepreneurs.
Startups have become an important source of self- employment and employment to deserving unemployed
youth in India. Startups are not only helping in enhancing our life style but are also providing innovative
solutions to our day to day problem. Global investors like Softbank, Tiger global etc. are investing heavily in
Indian startups which has resulted in increase in our FDI. Startups especially those related to technology and
services have far reaching ripple effect on the socio economic fabric of the demography. It is anticipated that
by 2020 India will be a home to 112 million working population falling in the age bracket of 20-24 years.
This demographic dividend will definitely boost the startup culture in the country.
Taxation is one of the important factors for growth of economy as well as startups. A transparent, easy and
simple taxation system with less paperwork will be more beneficial for startups. Now, with the introduction
of proposed GST all indirect taxes will be subsumed into one single GST.
This will surely impact the cost of manufacturing or service providing by startups. Therefore it becomes
important to assess the impact of such single tax on Indian startups.
This study tries to understand the changes that proposed GST will bring in Indian economy and its impact on
the growth and cost structure of Indian startups.
4. LITERATURE REVIEW
Dr. R. Vasanthagopal (2011) concluded that Current indirect tax system is very complicated and switching to
GST will be a huge positive step in booming Indian economy. According to him the Success of GST in India
will lead to its acceptance by more than 130 countries in world and a new preferred form of indirect tax
system in Asia too.
Nitin Kumar (2014) too believes that implementation of GST in India will help in removing economic
distortion by current indirect tax system and expected to encourage unbiased tax structure which is
indifferent to geographical locations.
Monica Sehrawat and Upasana Dhanda (2015) believes that the burden of taxation under GST will be
allocated fairly between manufacturing and services which will result in low tax rates with increase in tax
base and minimized exemptions. They also believe that success of GST will be dependent on rational design
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and timely implementation of GST.

Nishita Gutpa (2015) argues that GST is not simply VAT plus service tax, but a major
improvement over the previous system of VAT and disjointed services tax
– a justified step forward.
Shakir Shaik (2015) point outs that India will now join the world wide standards in taxation,
corporate laws and managerial practices with introduction of GST and after sometime will
be one of the leaders in all these fields.
However Shefali Dani(2016) sees proposed GST regime as a half-hearted attempt to
rationalize and change very old indirect tax structure. She argues that there is no clear
consensus over certain important issues like threshold limit, revenue rate, and inclusion of
petroleum products, electricity, liquor and real estate. Until consensus on such items is
reached, the government should resist from implementing such regime.
Hitesh K. Prajapati (2016) also supports this idea and says that the success of GST will
depend on two important factors – 'RNR'(Revenue Neutral rate) and 'threshold limit' for
GST.
RESEARCH METHODOLOGY
Since GST is yet to be introduced, very less research has been in this field. Data has been
collected from various secondary sources. The main source of research was the Draft GST
bill available at Finance ministry's website along with reports of various firms like PWC
and EY.NASSCOM's report on startup and CRISIL's report on logistics cost has been used
for assessing the impact of GST on startups. Apart from this various newspaper articles and
websites has been considered for this research paper list of which can be found in reference
section.
SALIENT FEATURES OF GST
Applicability
Goods and service tax is applicable to whole of India including Jammu and Kashmir. GST
is to be paid on supply of goods and services. For this purpose goods means all kind of
movable properties which can be moved in physical form(only tangible).It further includes
securities, growing corps and grass and things attached to land like signage or electricity
pole. However it excludes money and actionable claim.
For the purpose of GST, Services means anything other than goods i.e. any activity either
passive or active. It includes intangible property like patents, trade- marks, copy rights etc.
It also include actionable claim but excludes money.
Model of GST
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Goods and services tax has been divided in 3 parts.

IGST: Integrated GST which is levied on interstate supplies or services. In such cases,
collection of taxes will be done by central government but the money will be distributed
between Central government and state government.
CGST: Central GST which is levied on intra state supplies or services in which collection
and retention of such taxes is done by central government.
SGST: State GST which is levied on intra state supplies or services in which collection and
retention of such taxes is done by state government.
India has opted for dual model of GST. State GST is to be collected by the State
Government; Central GST is to be collected by the central government and integrated GST is
to be collected by the central government on inter-State transactions.
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i) Date of removal of goods by supplier

ii) Date of receipt of goods in books of receiver
iii) Date of issue of invoice
iv) Date of payment by receiver
Time of supply of services is the earliest of following dates:
i) Date of issue of invoice
ii) Date of completion of service
iii) Date of receipt of services in books of receiver
Place of supply
Supply place is the real consumption place. In general the place of supply of goods is the
place where goods are delivered and the place of supply of services is the location of a
registered person or the address of the recipient. Place of supply is important for the
purpose of determining whether the supply is interstate or intra state. If supplier's place and
supply place is in same state then it is an intra- state supply and hence S-GST and C-GST
will be applicable otherwise it will become an interstate supply and I-GST will be
applicable.
Input tax credit
Input tax credit under proposed GST is available subject to following conditions.
i) Input tax credit of C-GST can be taken for C-GST and I-GST only.
ii) Input tax credit of S-GST can be taken only for I-GST and S-GST only.
iii) Input tax credit of I-GST can be taken for any of the three i.e. for I-GST, S- GST and C-
GST too.
In short we can say that C-GST input can't be utilized for playing S-GST and vice-versa.
For claiming Input tax credit, person has to fulfill following proce- dural conditions.
i) Person must possess tax invoice.
ii) Person must acknowledge receipt of supply of goods/ services.
iii) Supplier must change payment of tax in invoice.
iv) Person must file GST return.
Mode
GST network will be used as common portal for submitting registration applica- tion,
making tax payment and filing returns for GST. It has been incorporated as sec 8 company
with 24.5 % holding by central government, another 24.5% by EC and all states together
and remaining 51% by financial institutions.
TDS @ 1% will be deducted whenever the value of supply exceeds 10 lakhs. The form of
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assessment will be self-assessment. Audit by CA or CWA is compulsory for taxable

persons.
COMPARISON OF PROPOSED GST AND CURRENT TAX STRUC- TURE
Current tax structure
Currently a business house has to pay many indirect taxes some of which are levied by
central government and others by state government. The following table gives the list of
indirect taxes which one has to pay in order to do business in India.
Table 1: Details of model of GST.
Basis C-GST S-GST I-GST
Expected rate 9% 9% 18%
Collected by Central government State government Central government
Central and State
Retained by Central government State government
government

Table 2: Listing of different type of indirect taxes applicable in India.

Indirect taxes In India

Levied by Central Government Levied by State government
Custom duty Entry tax and Octroi
Excise Duty Entertainment tax
Central Sales Tax Electricity duty
Service Tax Luxury tax
VAT
Property Tax

Taxable person
Manufacturers, Traders and Service providers will be the taxable person for GST. However
small business entities are exempted from such tax. Small business whose total annual
turnover is less than 20 lakhs (10 lakhs in case of north east states) will be exempted from
GST. Further the provisions of GST will not be applicable to Agriculturist. It should also be
noted that these provisions are also not applicable for employer- employee transactions.
Taxable point
For proposed GST, the taxable point will be supply of goods or services instead of
manufacture or production of goods, provision of services or sale of goods. The time of
supply of goods is the earliest of following four dates:
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One has pay taxes which are applicable to them added by surcharge and cess. Each tax has
its own different rate/set of rates. One of the problems of such different taxes is cascading
effect. For example – If Mr. A manufactures goods for Mr. B and pays excise duty @ 10%
on raw materials. He then sales the goods to Mr. B after charging central sales tax at 10%.
The amount of central sales tax includes the excise duty paid on raw material and this is
how it becomes tax on tax which is known as cascading effect. This happens because credit
of CST was not available against excise duty and vice versa. Apart from this one has to
maintain different records for different taxes increasing their documentation and expert
advisory costs. There was a lack of transparency in approaches to different taxes levied by
different state governments. These things made doing business in India a difficult exercise
in comparison to other developing countries. Following table shows the impact of all these
taxes on various stakeholders.

Table 3: Impact of present indirect taxes on various stakeholders.

Stakeholder Intrastate trade Interstate trade International trade

Value of goods (1) xx Value of goods (1) xx Value of goods (1) xx
Manufacturer (+) Excise duty xx (+) Excise duty xx (+) BCD xx
or Importer (+) VAT xx (+) CST xx (+) CVD xx
Value of goods (2) xx Value of goods (2) xx Value of goods (2) xx
Trader Value of goods (2) xx Value of goods (2) xx
or (+) VAT xx (+) CST xx Tax exempt xx
Exporter Value of goods (3) xx Value of goods (3) xx
Value of goods (1) xx Value of goods (1) xx Value of goods (1) xx
Service (+) Service tax xx (+) Service tax xx (+) Service tax xx
Provider Value of goods (2) xx Value of goods (2) xx Value of goods (2) xx

BCD – Basic custom duty, CVD – Countervailing duties, VAT – Value added tax, CST-
Central sales tax
Tax system under GST
Under proposed GST, one has to pay only one tax i.e. Goods and services tax. Except for
custom duty, tax on alcohol and some other taxes, all other indirect taxes will be subsumed
under the umbrella of GST. Now one doesn't have to pay different taxes on different
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occasions. However India has opted for Dual GST model due to which GST has been
divided in 3 parts i.e. C-GST, S-GST for intra- state transactions and I-GST for interstate
transactions. The impact of proposed GST on different stakeholders has been shown in the
following table.
Table 4: Impact of GST on various stakeholders

Stakeho Intrastate Interstate Internationa

lder trade trade l trade
Manufac Value of x Value of x Value of x
turer or goods or x goods or x goods or x
Importer services services services
(1) (1) (1)
(+) C- x (+) I- x (+) x
or GST x GST x BCD x
(+) S- x x (+) I- x
Trader GST x x GST x
or
Servic Value of x Value of x Value of x
e goods or x goods or x goods or x
Provid services services services
ers (2) (2) (2)
Present tax Structure v/s GST: Comparison
Table 5: Comparison of present tax system with GST

Basis Present GST scenario

scenario
No. of Different indirect Single tax i.e.
Taxes taxes levied by Dual layered GST
central as well as levied by central
state governments. and state
government.
Basis Goods – Taxable at Taxable at place
of place of of consumption as
char manufacture/sale GST is destination
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ge Services – Taxable based tax.

at place of
rendering of
services.
Registrat Decentralized Centralized
ion registration for registration
different taxes under GST
under central and network.
state governments.
Collecti Different Uniform and
on of procedures for common process
tax different taxes under GST
which varies from network.
state to state.
Filing Different dates and Single date for
of different filing of return
Retu provisions for under GST
rn each tax. network.
Input Narrower scope Broader scope
Credi For example – Only input of S-
t of input of VAT GST cannot be
tax cannot be used used against C-
against excise duty. GST and vice
versa.
Casca No set off is Not possible under
ding available for Excise GST since full
effec duty against VAT credit is
t which leads to available.
cascading effect.
Tax Different for Expected rate is
Rate different 18%
taxes and
states.
Thresh Central Excise – 1.5 20 lakhs
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old crores VAT – (10 lakhs in case of

limit between 5 to 20 North east states)
lakhs Service tax –
10 lakhs
Exempti Some areas like No such
ons excise free zone exemptions.
enjoy status of
excise exemptions.
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5. IMPACT OF GST ON STARTUPS

Positive Impact
i) Simpler taxation
Different taxes in different states were a complex and burdensome process. Now when all
indirect taxes are subsumed into one single tax, tax calculations will become simple with
less paperwork. Startups related to software industry will be largely benefited from single
rate of tax since in present scenario VAT, service tax and excise, all the 3 or at least first
two are applied on software products or ser- vice.
ii) Common registration
Unlike before where they had to registration again and again for different taxes or different
states, Startups now have to register only once on GST network and they can do business
in any part of India without any hassle. This will make whole India, a common market for
startups and pave ways for expansion of their business.
iii) Higher threshold limit
Threshold limit of service tax is 10 lakhs while the threshold limit of VAT varies from 5
lakhs to 20 lakhs in different states. Startups will be eligible for higher threshold limit of
20 lakhs (10 lakhs in case of North East states). Also startups whose annual turnover is less
than 50 lakhs can opt for composition levy at a lower rate.
iv) Reduced logistics cost
GST might prove to be a much needed boon to e-commerce websites. According to
CRISIL report, GST will reduce logistics cost by 20% helping in reducing the cost of e-
commerce startups. Reduction in logistics cost will also lead to more business for logistics
companies.
v) Improvement in Logistics efficiency
According to Vijay Shekhar Sharma, Founder Paytm “Due to complexities of entry tax and
other processes, customers from certain states could not order some items from the online
shopping destinations.” Seamless movement of goods in a common market will help
startups in delivering goods early to customers since state border checks used to delay the
movement of goods from one state to another. Also this will bring down the inventory and
storage cost of startups.
vi) Transparency and reduced compliance cost
With introduction of GST, the overall compliance cost is going to be reduced since now
there is only one tax and provisions related to act to comply with. GST network will also
ensure transparency in calculation of taxes and input tax credit.
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Negative impact
i) Not a single rate of taxation
India has opted for dual model of GST due to which we have C-GST and S-GST for
intrastate transactions and I-GST for interstate transactions. Many critics argue that these
three are nothing but the new names for Central excise/service tax, VAT and CST.
ii) Increase in tax rate for service providing startups
Startups who are engaged in providing services only presently had to play service tax only
at the rate of 15%. However after the introduction of GST with an expected rate of 18%,
there will be an increase of 3% in tax rate for such startups. This is one of major demerits
for Indian startups since majority of Indian startups are engaged in services sector. With
introduction of GST they have to increase prices to compensate such increase in tax since
they can’t afford to absorb more losses.
iii) Exclusion of certain taxes
GST will not be the only indirect tax that a startup has to pay. Apart from GST. Startups
will have to pay custom duty on imports since Custom duty is kept out of preview of GST.
Further electricity, real estate etc. have been excluded from GST which may lead to a
mangled Indian version of GST.
iv) Frequency of filing of return
The model GST guidelines state that e-commerce startups will have to file quar- terly as
well as monthly returns on GST network. Further they will also have to collect taxes from
sales made on their portal .This will lead to increase in docu- mentation and administrative
cost for such start-ups.
v) Cross set off of levy is not allowed
In proposed GST, the input credit of C-GST cannot be set off against S-GST and vice
versa. While in present system set off of excise duty and service tax is allowed.
6. SUMMARYAND CONCLUSION
In this paper, an attempt was made to explain the changes in indirect taxation in India after
introduction of GST and its impact on various stakeholders with spe- cial focus on startups.
Startups are an important source of employment and key factor in development of Indian
economy besides increasing FDI inflows in India and driving innovation to solve our daily
problems. Taxation is an impor- tant factor which every startup has to consider and thus it
becomes very impor- tant for them to assess the impact of the proposed GST. GST is
applicable to
whole of India. It subsumes almost all indirect taxes into one tax thus creating a common
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market and seamless flow of goods and services across the nation. There are many
advantages of GST for startups. Simpler taxation and common registration will lead to ease
of business. Higher threshold limit will also help small startups. Apart from that there will
be a decrease in logistics and compli- ance cost and increase in logistics efficiency which
will ultimately benefit startups as well as Indian economy.
However GST is not a single rate of taxation and exclusion of certain taxes and items can
result in a mingled version of Indian GST. The main concern is the increase in tax rate by 3
%( from 15% to 18%) for service providing startups. Fur- ther the frequency of returns is
more which will increase documentation and administrative cost for startups.
In conclusion we can say that Introduction of GST will have both positive and negative
impact on startups. Proposed GST act may not be completely perfect but in spite of all these
problems GST is one of the most business friendly reforms in India and in long term the
benefits of GST for startups are likely to overcome the problems of GST.
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8. Kumar,Nitin. Goods and Service Tax in India-A Way Forward, Global Journal of
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bill/articleshow/52776435.cms
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8. What GST Means for the Startup Ecosystem. (2016, Sep 25). Retrieved from
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1. Model GST taw. (2016, Oct 1). Retrieved from
finmin.nic.in/reports/modelgstlaw_draft.pdf
2. Nasscom Startup Report. (2016, Oct 1). Retrieved from
www.nasscom.in/download/publication/fid/120806
3. Decoding the draft of model GST model. (2016, Oct 4). Retrieved from
https://www.pwc.in/assets/pdfs/services/tax/indirect_news_alert/2016/decoding_the
_draft_model_gst_law-key_features_of_the_draft_model_gst_law.pdf
4. EY highlights of model GST. (2016, Oct 4). Retrieved from
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highlights-of-model-gst.pdf
5. GST presentation. (2016, Oct 4). Retrieved from
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