How Imports and Exports Have Changed in India After GST

Foreign trade is one of the major factors that determine a country’s economic growth. Exim policies are often a matter of priority for new governments as they try to recalibrate the political and economic narratives. Today, India is the fastest growing major economy in the world with a popular government, that is generally perceived as business-friendly, at the centre. Financial year 2016-17 saw a 4.7% jump in total exports by Indian companies. However, at the same time India also has a trade deficit of $105.7 billion, which means the imports still exceed its exports. Hence, the rollout of Goods and Services Tax in 2017 created anxiety and apprehension among business analysts who are already concerned with the rising import bill.

Under the previous system, various import duties were applicable on imported goods. These included countervailing duty, custom duty, and special additional duty among others. On the other hand, service tax was also levied on imported services.

Under the new system, all indirect taxes levied on imported goods & services are replaced by the Integrated Goods and Services Tax (IGST). But there are certain exceptions to the rules as well. For example, petroleum products and pan masala imports are still liable to countervailing duties. Moreover, protective taxes such as customs duty and education cess, among others, are still being levied on certain goods. Imported services, however, only attract IGST now.

Under GST, imports are treated as supplies from one state to another. So, as GST is a tax levied based on destination, the IGST is charged at state level, i.e. where the goods are being consumed or services being utilized.

GST on services imported:

GST provisions put services under IGST when,

  • The service supplied is located outside of Indian territory.
  • The service is received from within Indian territory.
  • The place where service is supplied is in India.

Imports of services on or post 1st July 2017 are chargeable under IGST – even in case the actual transaction was dated earlier than the date GST came into effect. Also, if a partial payment of applicable taxes has been made under the former system, the rest of the tax to be paid is applicable as per the GST law.

Filing Tax Returns:

GST requires monthly tax filings as opposed to the previous system where importers filed returns as per State Taxation Laws for goods imported and as per Central Taxation Laws for declaring countervailing duties. Now, while filing monthly GST returns, importers have to declare the imported goods as per Table-5 and imported services under Table-6, respectively, of the GSTR-2 form.

Exemption:

Goods being transported by air and shipments inbound were not subject to service tax under the previous system. However, under GST, such goods are no longer excluded from taxation.

Impact of GST on Export:

In case of Zero-rated supplies, i.e. exports, the entire supply chain is tax-free. So, no tax is levied on input tax side or the output side. If GST is paid for exports from India at any stage in the supply chain, the trader can export without paying IGST. He could also choose to pay the IGST and seek a refund later.

Indian Government Reduces the Tax Burden on SMEs

Indian economy has stayed robust for the past few years. Global credit rating agencies continue to display confidence in the Indian economy and the government is also optimistic about meeting its fiscal targets. This in turn has prompted the government into taking on some bold reforms to the Indian economic system in the past. In yet another move, the government has announced through the Ministry of Finance that it is lowering the rate of deemed profits under the presumptive scheme for businesses.

This is good news for small and medium enterprises operating in manufacturing, wholesale, retail and trading. Earlier, when a business opted for the presumptive scheme of taxation under section 44AD, 8% of its total turnover or gross receipts was taken as net income chargeable under tax. However, the government has announced a new incentive for businesses wherein they can reduce this tax rate to 6%.

How you can reduce the tax on your business income under the new scheme?

Well, going digital and creating a low cash environment is one of the government’s primary economic objectives. The new scheme is an incentive for small and medium businesses who conduct their business transactions through electronic mediums. A statement by the finance minister also reflected this sentiment as he noted that small businesses can save up to 30% in taxes by availing this scheme and going cashless.

To take the benefit of the scheme the precondition for traders and businesses is that all their payments should be through digital means. Hence, the deemed profit rate shall be reduced from 8% to 6% for those who satisfy the pre-condition.

Who can benefit from the scheme?

SMEs which have already moved to digital transactions will benefit the most from this scheme. The tax rebates are being given with a retrospective effect. So, if your business has been accepting payments through digital transactions since 1st April 2016, you can claim tax benefits under the scheme up to 31st March 2017.

Consequently, if you have missed that opportunity, there is still a silver lining for your business, as you can benefit from the scheme by moving your future transactions through electronic modes. One caveat of the scheme is that all transactions done through cash are still liable for taxation at 8% under the deemed profit presumptive taxation scheme.

The following table shows how a business can save taxes under the new scheme.

Particulars

100% Digital 100% Cash 50% Cash, 50% Digital

Gross Turnover

₹ 1 Crore ₹ 1 Crore

₹ 1 Crore

Digital Turnover

₹ 1 Crore Nil

₹ 50 Lakhs

Cash Turnover Nil ₹ 1 Crore

₹ 50 Lakhs

Deemed Profit @6%

₹ 6 Lakhs NA

₹ 3 Lakhs

Deemed Profit @8%

NA ₹ 8 Lakhs

₹ 4 Lakhs

Total Profit

₹ 6 Lakhs ₹ 8 Lakhs

₹ 7 Lakhs

Deductions u/s 80C

₹ 1.5 Lakhs ₹ 1.5 Lakhs

₹ 1.5 Lakhs

Taxable Income

₹ 4.5 Lakhs ₹ 6.5 Lakhs

₹ 5.5 Lakhs

Tax Payable

₹ 15,452 ₹ 56,650

₹ 36,048

Tax Savings ₹ 41,198 Nil

₹ 20,596

So, by going the digital route, a small business owner can save as much as 72% in taxes through the new presumptive tax scheme. Such a margin can be a huge relief for small business owners and Kirana shop owners who operate at very thin profit margins. A legislative amendment in this regard was carried out through the Finance Bill, 2017.

Additional benefits of the scheme

Since this scheme is aimed at bringing more transparency to the organised and unorganised small and medium business sectors, there are several other financial benefits for SMEs as well.

Raising Capital through Investment will become easier for small business owners as the profit margins improve. An investor will be more willing to put his money in a business with healthy profit margins and support from the government of the day.

Getting Unsecured Business Loans through banks and NBFCs is also supposed to get easier for SME owners with an increase in their profits. However, here non-banking financial companies are positioned better than the banks. Traditional banks in India are simply too slow for the digital initiatives whereas NBFCs like Lendingkart Finance have already embraced digital finance, here’s how.

  • Lendingkart offers business loans online through their website and mobile app.
  • From application and document uploads to tracking, approvals and funds transfer, everything is done online.
  • An SME can get a business loan within 3 days’ time.
  • Digital financing allows Lendingkart to offer lower interest rates on business loans, reduce processing charges and waive off prepayment penalties.
  • Instant refinance available upon closing an existing loan.

Raising credit rating is another side benefit of the new scheme as more profits means less credit liabilities and subsequently a healthier balance sheet. This will raise a business’s credit score and help secure more financial resources for growth and expansion.

In conclusion

All in all, the new scheme is a very good incentive from the government and shows the ruling dispensation’s eagerness for market reforms. Small and medium business owners are set to gain from this scheme both in short-term and long-term. It would be good if the government can extend the benefits of these schemes to professionals taking the benefits of the presumptive tax scheme. However, one step at a time does the trick and we applaud the finance ministry’s proactive approach to business development in India. Moreover, the financial benefits of the scheme such as easy small business loans and growth in investment prospects are definitely positive steps for the economy and the people.

How GST has Become a Turning Point for SMEs of India

The Goods and Services Tax (GST) was cleared in 2017 after a decade long parliamentary hold up. Since then, the GST has raised India’s ease of doing business index as well as government revenues from small and medium enterprises. SMEs have also benefitted from the GST as it facilitates a simple tax regime for the country’s 51 million plus small business owners. The principle aim of the GST is to subsume multiple indirect taxes and reduce the paperwork that affects all kinds of trading.

So, what has changed after the introduction of GST in India?

The GST collects all indirect taxes across the value chain in a fair and transparent manner. Earlier, the goods and services were taxed separately by the Indian government. The central government would levy tax on manufacturing whereas the state governments would levy taxes based on sales. The whole system involved multiple layers of taxation and a lot of paperwork to be filed and verified. This not only made the whole process cumbersome and slow but also allowed tax evaders to find loopholes in the system.

Moreover, even the government’s administrators were often troubled by the implementation process of this overly complicated taxation system. Which would sometimes result in unjustified or dual tax on end users. The introduction of GST has converted all this chaos into a single-point taxation for each category of goods and services.

How the GST has benefited the SMEs and Entrepreneurs

The Indian SME sector is called the backbone of our economy. Providing employment to over 450 million people, the SMEs account for 45% of India’s GDP. While initial reviews of the GST implementation were a little skeptical in terms of cause and effect, the story is completely different today. Here’s how GST has allowed the SMEs and startups to prosper.

Reduced Tax Burden: The first and most obvious benefit of GST has been the cutting down of a slew of indirect taxes such as Service Tax, Entertainment Tax, Excise, Surcharge, Octroi etc. For example, Before the GST came into effect, a small business, with turnover of more than Rs. 5 lakhs, was required to pay a number of taxes at various points in the supply chain. Today, there is an exemption of GST for SMEs with turnover less than Rs. 20 lakhs. This in-turn has boosted the growth of small and medium businesses in India.

Market Unification: GST has also made it easier for SMEs to expand their customer base. Previously, the CST was implemented on inter-state sales which increased the price of locally manufactured goods being sold in other states. So, if a brassware manufacturer based in Western Uttar Pradesh wished to explore markets in Madhya Pradesh or Bengal, he would have to compete on price rather than quality of his products. GST has resolved this with the ‘one nation, one tax’ structure. A small business owner can now purchase and sell raw materials and finished products anywhere in India without having to worry about taxation and pricing.

Reduced Logistical Costs: GST has not only simplified the manufacturing and sales process but has also had a veritable positive effect on logistics in the country. With the abolishment of multiple entry taxes, there has been a drastic reduction in transportation time. The serpentine queues we witnessed at interstate toll booths are a thing of the past today. This in turn is saving a ton of money for transporters and manufacturers alike. There has been a domino effect on manufacturing as well. As goods move quicker, they sell quicker, and hence picking up the demand for new stock, thus spurring manufacturing.

Enhanced Compliance: The simplification of taxation and regulatory measures surrounding GST has also helped in increasing tax compliance in India. SMEs have taken to the new system like fish to water as it helps in legitimizing their enterprise and gain benefits like access to new markets, increasing sales and revenues, improving credit rating and getting small business loans. Furthermore, the digitization of the taxation system has also reduced human intervention – which was a primary detriment of the previous system. All compliance procedures such as registration, payments, refunds, and returns have been moved online ensuring automated delivery of GST certificates. This has brought transparency to the system and reduced the instances of bureaucratic harassment.

Made it easier to start new businesses: GST has also spurred the growth of startups and new businesses in India by doing away with different kinds of VAT registrations and varying taxation policies of states. By centralizing the whole system GST ensures fast execution and lowered costs for starting a new venture. Small business owners can now utilize more of their money for setting up and expanding their business rather than paying up unnecessary taxes and fees.

Spurred SME finance: The underlying effect of GST has been an increase in financial activity by the small and medium businesses as they open to new markets and new growth opportunities. This has led to a wider acceptance of alternate financing options from FinTech lenders who offer customized business finance for SMEs in India. Lucrative small business loans with lower interest rates can be secured within 3-days from NBFCs like Lendingkart. In turn, NBFCs have also digitized their services in tandem with GST, which means people can apply for small business loans online, submit documents, get approvals and disbursal, all through electronic channels. Online business loans have also reduced the interest rates, processing charges and prepayment penalties for SMEs.

Concluding Thoughts

The GST is but a step in the market reforms needed by the Indian economy. However, the follow up by the Indian Government after the implementation of GST speaks volumes about its commitment to regularizing the financial system. Several minor and major updates have been made to the GST filing and implementation process by the review committee and more are expected to come as the system matures. For now, the GST has revolutionized the way Indian SME industry operated, marking it as a definite turning point in the country’s growth story.

5 Tax Saving Tips for Small Business Owners in India

For running your own business in India you require a string of statutory compliances and remember to pay the attached fees and taxes. Even after the implementation of GST last year, the Indian taxation system remains complex as ever and your business ends up paying a significant amount in taxes to the government.

Today, we are sharing 5 tax saving tips for Indian business owners, including best practices to help you earn more from your business venture.

Claiming  benefits on a housing loan

If you have an active home loan, you can claim its interest to be a deduction from house property and claim the principal as deduction under Section 80C (limited to a maximum of Rs. 150,000).  This will effectively reduce your overall taxable income by reducing your ‘income from house property’ in ITR.

Electronic payment of municipal taxes

You can also claim the taxes paid to your municipal corporation or municipality as deductions under income from house property. You simply need to keep a record of the payments and copy of receipts. Electronic payment of municipal taxes ensures that your bank account have the necessary proof in case you damage or lose the receipts.

Switch to smart and efficient accounting

Since most small businesses in India are labour intensive enterprises, they are used to pay wages in cash. Sometimes, as much as 40% of a small business’s manufacturing expenses may be going into direct and indirect wages. If your business fails to keep track of these expenses, then your profit margins increase because of unrecorded entries in your expenses account and you are liable to pay more taxes. So if you have been neglecting bookkeeping for a while now, it is time to take a closer look at the state of affairs in your accounts department. You can also take help of a free accounting software to make matters easier.

Claiming Additional Depreciation

The Income Tax Act allows a claim of additional 20% depreciation on new machinery installed during the year. The provision meant for the benefit of certain notified industries under the Section 35AD and it is only applicable for the first year of a new machine or equipment’s operation. By claiming the additional depreciation @20% you can claim save that amount as expenses incurred.

Deducting TDS

There are certain transactions which require you to deduct the tax at source, such as payments made as commission to your business agent or a freelance employee. If you fail to deduct the TDS the whole amount becomes inadmissible for claiming tax rebates. So make sure that you keep track of all such transactions and deduct tax @10% for them.

So these are some tips / best business practices which will allow you to save more by reducing your tax burden. In case you have been a little less prudent with accounts management in the past, it is never too late to adopt these practices. In the meanwhile, you can also apply for short term business loans to get out of current financial troubles and start your business’s recovery. To know more about fast business loans, click here.

Why Dual GST and How it will affect your Business?

Businesses all over the country have felt the impact of the government’s decision to change the country’s goods and services tax code. The new tax, GST, will change the way our country does business, affecting all businesses engaged in sale/supply of goods or supply of services.

What is GST?

The Goods and Services Tax (GST) is a revised and comprehensive form of previously implemented Value Added Tax (VAT). The GST is an indirect tax and replaces many cascading taxes levied by both Centre and State governments. Supply chains, ERP services, product pricing, etc. will all fall under the ambit of GST.

What is Dual GST?

The Union Government and the States were unable to form a consensus for tax revenue sharing. Therefore, the government has introduced a dual GST system – Central GST (CGST) and State GST (SGST).

Example – If a dealer in Rajasthan, selling goods to consumers within the state, makes a sale of INR 20,000 at 18% GST rate. Then the dealer will collect INR 3,600 as total tax. In this case CGST and SGST will be shared by Centre and State equally as INR 1,800 each.

Effective July 1, both CGST and SGST are applicable on the taxable value of goods and services shipments pan India, except in the State of Jammu and Kashmir.

Impact of GST on your pricing

Implementing GST will reduce the impact of numerous indirect taxes which were applicable on your manufacturing and supply chain. This will allow you to decrease the cost of product and services in mid to long term and pass on the benefits to your customers. Although, for various services, the short-term prices may go up as the tax rate has been raised by 4-6%.

Effects of GST on your SME:

The dual structure of GST is meant to be fairly simple and transparent, with only a handful of CGST and SGST rates being implemented. The new tax regime includes both costs and benefits for SMEs:

  1. Reduction in the number of taxes you were paying earlier. However, Customs Duty and some other levies are still in place for imports and excepted items under GST
  2. Reduction in your transactional costs due to simplified tax compliance code and online procedure • On the flip side, GST might increase your operating costs if you do not have tax professionals to look after your annual filings. So, hiring an expert may be your only way to have tax compliance
  3. Compliance issues may also arise due to the mid-year implementation of CGST and SGST
  4. If you are running a manufacturing SME the tax burden may increase since the excise laws exempted units below 1.5 crores whereas the limit is now 20 lakhs

Who should register for GST?

  1. If your business is registered under VAT, service tax or excise duty, you can move your registration to GST. Also, firms and companies with a turnover of 20 lakh or more per annum are mandatorily required to have a GST registration. If your business involves inter-state transactions, GST registration is mandatory for you, regardless of the turnover
  2. Websites and portals where supply of goods and services is managed are also required to register with GST without exception
  3. An Input Service Distributor, which means a head office that receives billing for all its branches, is also mandatorily required to register for GST

Have you adapted to the new GST regime, and how much impact do you think it has had on your business? Let us know in the comments.

The sequel to this post will deal with how to leverage GST in getting a competitive edge for your business.

More read on GST:

How Imports and Exports Have Changed in India After GST
How GST has Become a Turning Point for SMEs of India
5 Tax Saving Tips for Small Business Owners in India