GST Guide for small businesses

In this article, you will find answers to the most important questions about GST and how it affects you, as a business owner.

1.     What is the GST bill?

2.     Who does it apply to, what are the exceptions?

3.     How is GST different than the current tax system?  What changes?

4.     How does it impact me and my customers?

1.     What is the GST bill?

GST, is a new tax that will be imposed on the sale and purchase of goods and services in India. GST will replace all taxes in India with a single unified tax applied to value addition instead of the total value of the product at each stage in the supply chain.

This method provides credit for the input tax paid on the purchase of goods and services, which can be offset with the tax to be paid on the supply of goods and services. As a result, this reduces the overall manufacturing cost, with the end customer paying less.

Let’s take an example of how GST would work:

A farmer sells milk to an ice cream manufacturer, who then processes the milk to make ice cream and sells it to several retail stores.

The farmer sells the milk at Rs.10. If the GST rate is 10%, then the added tax will be Rs.1, so the ice cream manufacturer will purchase milk for Rs.11 (10 + GST 10%). After making the ice cream, he adds Rs.10 as his margin. According to GST, the manufacturer will now apply tax only to the value addition of Rs.10 (adding another Rs.1), instead of applying it to the total value of Rs.21 (Rs.11 + Rs.10). So, the manufacturer sells his ice cream to a retailer for Rs. 22 (Rs.11 + Rs.11). The retailer then adds a value of Rs. 10, and GST of 10% (Rs.1) is applied to that value addition, which makes the total cost of the ice cream Rs.33 (Rs.22 + Rs. 11) for the end consumer.

Note: The GST rate is yet to be determined. Experts and tax analysts predict the GST rate will be somewhere between 18-20%. Members of the Parliament have proposed an 18% cap on the GST to reduce tax burden.

2.     Who does it apply to? What are the exceptions?

Businesses with turnover revenue of 20 lakhs and above will have to register and file for GST returns, with a threshold of 10 lakhs for businesses in the north east and hill states. So, if your company makes less than 20 lakhs or 10 lakhs if you operate in the NE of India, you will not have to register for GST.

These goods and services will be fully or partially exempted from the GST:

Alcohol for human consumption (State Excise plus VAT will continue to be applied)
Electricity (Electricity Duty)
Real Estate (Stamp Duty plus Property taxes)
Tobacco products (GST plus Central Excise will be applied)

3. How is GST different than the current tax system? What changes does it bring? 

Currently, there are many indirect taxes being applied on goods and services in India. To simplify the collection of these taxes and makes the process more transparent, GST will replace all of these taxes with a single unified tax applied to value addition instead of the total value of the product at each stage in the supply chain.

Here’s a list of current central taxes that the GST will replace:

Central Taxes that GST replaces: State Taxes that GST replaces:
Central Excise Duty VAT / Sales Tax
Additional Excise Duties Entertainment Tax (unless it is levied by the local bodies).
Excise Duty (Medicinal and Toiletries Preparation) Luxury Tax
Service Tax Taxes on lottery, betting, and gambling
Additional Customs Duty, commonly known as Countervailing Duty (CVD) State Cesses and Surcharges that are related to the supply of goods and services
Special Additional Duty of Customs Entry Tax, not in lieu of Octroi

The GST will follow a similar model with the one before it:

  •       Central GST (CGST), collected by the Centre and
  •       State GST (SGST), collected by the State.
  •       The Integrated GST (IGST), for the inter-state transactions, will be collected by the Centre from                        the buying state and will be equal to the average of the CGST and SGST rates.

CGST and SGST will be applied to all transactions, apart from exempted goods and transactions below the agreed threshold limit. They will be paid separately, to the Central and State accounts and tax returns will be filed with the appropriate CGST and SGST authorities.

Dealers and manufacturers who pay CGST or SGST will be given input tax credits (ITC), meaning they receive credit for the taxes they paid on their purchases. The credits of the CGST can only be used for the CGST paid. The same is applied in the case of SGST.

4.     How does it impact me and my customers?

Free movement of goods: Business owners will be able to sell more in other states without having to worry about interstate transaction costs. With GST, the entry tax will be eliminated, which will save time and money spent.

Reduced tax cost: Businesses will benefit from reducing the tax burden and operational costs. The GST will work with Input Tax Credits thus eliminating the need for tax cascading. Business owners will be able to offset the tax paid on purchase with the tax on the supply of goods and services.

Easier to comply: Currently there are around 15 different legislatures with different definitions, tax rules and regulations. GST will simplify part of these taxes, making it easier for businesses to comply with the law.

Cheaper products for your customers: Under the current system, from the production to the consumption of a product, there are multiple taxes that are applied without the provision of tax credits. As a result, the price of the final product is increased, causing the customer to pay more. The GST will absorb many of the current taxes into a single tax, while also providing tax credits. This will reduce the price of final products for end consumers. 

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