Starting a new business is both exhilarating and difficult. One of the most important decisions you will make as an entrepreneur concerns your tax structure. The Goods and Services Tax (GST) has streamlined the taxation structure in many nations, including India, by replacing multiple indirect taxes. Even within the GST framework, however, there are various schemes available, each geared to cater to enterprises of diverse sizes and complexities.
Choosing the best GST scheme for your startup is an important step because it will affect your tax liability, compliance requirements, and overall business operations. In this detailed guide, we’ll look at the various GST plans in India and help you decide which one is ideal for your firm.
1. Understanding the Fundamentals of GST
Before getting into the various GST programs, it’s critical to first grasp how GST works. GST is a destination-based tax applied to the sale of goods and services in India. It is divided into four tax brackets: 5%, 12%, 18%, and 28%. Furthermore, certain necessary items and services are tax-free.
GST has streamlined the taxation process by replacing several indirect taxes like as VAT, CED, and Service Tax, among others. Businesses registered under GST collect and remit GST from customers, easing the tax collecting process.
2. Different GST Schemes in India
Now, let’s look at the numerous GST schemes available in India and learn about their qualifying requirements and benefits.
a. Standard GST Scheme
The Regular GST Scheme, also known as the Normal GST Scheme, is India’s normal manner of GST compliance. Businesses with a yearly revenue that exceeds the stipulated amount must register for GST under this system. The GST rates applicable to the business’s products or services will determine the amount of tax collected and submitted to the government.
Pros:
- Allows for input tax credit (ITC), which allows firms to claim a credit for GST paid on inputs, lowering the overall tax burden.
- Suitable for companies with large turnovers and sophisticated operations.
Cons:
- Regular GST filing is required, which can be time-consuming and complex.
- Compliance regulations might be difficult to meet for companies with minimal resources.
b.Scheme of Composition
The Composition Scheme is intended to make tax compliance easier for small firms. To be qualified, a company must have an annual turnover that is less than a certain amount, which varies by state. Businesses are taxed at a fixed proportion of their turnover under this plan, and they cannot impose GST on their invoices.
Pros:
- Reduced paperwork and simplified tax compliance.
- Tax liability is lower as compared to the standard scheme.
- Perfect for small enterprises with a local clientele.
Cons:
- There is no input tax credit (ITC), which might raise overall costs for firms.
- Interstate sales and e-commerce transactions are restricted.
- Turnover-based eligibility criteria are limited.
c.GST Service Composition Scheme
The GST Composition Scheme for Services, like the Composition Scheme, is intended for service firms with an annual revenue below a certain threshold. Service providers who choose this arrangement must pay GST at a specified proportion of their turnover.
Pros:
- Service providers’ tax compliance has been simplified.
- Tax duty is reduced when compared to the standard system.
- Ideal for entrepreneurs providing services to a local clientele.
Cons:
- There is no input tax credit (ITC) available.
- Turnover-based eligibility criteria are limited.
- Interstate service restrictions.
d.GST Annual Return Submission
The GST Annual Return Filing Scheme is a compliance requirement rather than a separate GST scheme. Every registered firm is required to file an annual return that summarises their fiscal year’s financial transactions.
Pros:
- A detailed review of a company’s financial activities.
- Ensures tax reporting openness and accountability.
Cons:
- It can be time-consuming and difficult, especially for businesses with significant transaction volumes.
- Noncompliance may result in sanctions.
3. Considerations When Selecting a GST Scheme for Your Startup
Now that we’ve gone through the various GST systems, let’s go over the major variables to consider when determining which plan is best for your startup:
a. Annual Turnover: Your annual turnover is an important factor in evaluating your eligibility for different GST schemes. Consider whether your startup’s turnover fits under the Composition Scheme or the Composition Scheme for Services’ stipulated boundaries.
b. Business Type: The type of goods or services your startup provides may influence your GST scheme selection. For example, if your company sells both goods and services, you may need to weigh the pros and cons of the normal scheme versus the composition scheme.
c.Interstate Sales: If your company intends to sell or provide services over state lines, you should be aware of the limitations imposed by some GST schemes, such as the Composition Scheme. Interstate transactions might be better served under the standard GST arrangement.
d. Input Tax Credit (ITC): Determine whether your company heavily relies on ITC. If ITC is a major cost-cutting driver for your startup, the Composition Scheme, which does not enable ITC, may not be the ideal option.
f. Compliance Capability: Evaluate your startup’s capacity to comply with GST regulations. The standard GST plan necessitates extensive documentation and frequent filings, which can be difficult for companies with minimal resources.
4. Making the Best Decision for Your Startup
You may make an informed decision on the best GST plan for your startup after carefully evaluating the variables listed above. Keep in mind that your decision may alter as your company develops and evolves. Here’s a step-by-step method for determining the best GST system for you:
Step 1: Determine Your Annual Turnover
Determine whether the annual turnover of your startup fits inside the limits set by the various GST schemes. This will assist you in determining which schemes you are eligible for.
Step 2: Consider the Nature of Your Business
Examine the nature of your company, particularly if you primarily provide items, services, or a combination of the two. Some programs may be better suited to certain sorts of businesses.
step 3: Examine International Transactions
Understand the effects of each GST scheme on interstate sales or services if your startup intends to engage in such transactions. For example, the Composition Scheme limits interstate operations.
Step 4: Determine the Input Tax Credit (ITC).
Calculate the impact of not being able to claim the ITC on your business expenses. This can have a substantial impact on your cost structure and profitability.
Step 5: Determine Compliance Capability
Assess your company’s ability to meet GST compliance standards, such as completing regular returns, keeping accurate records, and meeting deadlines.
Step 6: Examine Growth Prospects
Consider your startup’s potential for expansion and how your chosen GST structure will accommodate that growth. Consider whether switching strategies are conceivable in the future.
Step 7: Seek Professional Help
Discuss your startup’s specific conditions with a tax professional or a chartered accountant. They can offer useful insights and advice targeted to your company.
Step 8: Register and Comply
Once you’ve decided, register for GST under the specified scheme and ensure strict adherence to the applicable rules and regulations.
5. Composition and normal GST schemes are compared
A Contrast Between Composition and Regular GST Schemes
The Goods and Services Tax (GST) system in India provides businesses with two basic schemes to choose from: the Composition Scheme and the Regular GST Scheme. Each system has its own set of rules, advantages, and disadvantages. Let’s examine these two GST plans to assist you in making an informed selection for your business.
a.Criteria for Eligibility
Scheme of Composition:
- Businesses with yearly revenues of up to Rs. 1.5 crore (Rs. 75 lakh in some special category states) are eligible.
- The Composition Scheme is available to businesses that supply goods.
GST Scheme on a Regular Basis:
- Because there are no particular turnover limits, it is appropriate for organizations of all sizes.
- Applicable to enterprises that provide both goods and services.
b.Calculating Taxes
Scheme of Composition:
- The tax burden is computed based on the overall turnover at a fixed rate.
- Composition sellers are not permitted to charge GST on their invoices. They instead pay GST out of their own pockets.
GST Scheme on a Regular Basis:
- The applicable GST rates for particular goods and services are used to compute the tax due.
- Businesses registered under the standard plan can charge GST on invoices and collect ITC for GST paid on purchases.
c.Requirements for Compliance
Scheme of Composition:
- With quarterly GST returns (GSTR-4), compliance requirements have been simplified.
- It is excellent for small enterprises because it requires less documentation and paperwork.
GST Scheme on a Regular Basis:
- Involves more stringent compliance requirements, such as monthly GST returns (GSTR-1, GSTR-3B), comprehensive record keeping, and ITC reconciliation.
- Suitable for companies with more complicated operations and higher revenue.
d.Advantages of a Composition Dealer
Scheme of Composition:
- Simplicity: Less paperwork and compliance.
- Reduced Tax Obligation: Lower GST rates may result in a lower tax burden.
- Suitable for Small Businesses: This option is ideal for companies with minimal resources and a local consumer base.
GST Scheme on a Regular Basis:
- Input Tax Credit: Being eligible for ITC might result in cost savings.
- Flexibility: Appropriate for companies of all sizes, including those with complicated operations, interstate sales, and e-commerce transactions.
6. Who Can Apply for the Composition Scheme?
The GST composition program is available to small enterprises with annual aggregate sales of up to Rs. 1.5 crore. The aggregate turnover of all entities sharing the same PAN is pooled for composition scheme computation to determine eligibility.
a.Categories of Eligibility and Special Provisions
- Manufacturers, dealers, and restaurants (excluding those providing alcoholic beverages) are eligible for the composition system under Section 10.
- Meanwhile, service providers can adopt a parallel scheme for composition dealers, as described in CGST (Rate) announcement no. 2/2019, issued March 7, 2019, if their total turnover does not exceed Rs. 50 lakh.
- Notably, on March 31, 2022, a specific composition scheme was implemented for brickmakers. This includes construction bricks, fossil meal-based bricks, earthen or roofing tiles, and fly ash bricks and blocks. Enrollees in this scheme benefit from a 6% fixed tax rate with no input tax credit.
b.The Composition Scheme’s Exclusions
- The composition system does not include the following categories:
- Ice cream, pan masala, and tobacco product manufacturers
- Businesses that deal with interstate supplies
- Taxable non-residents and casual taxpayers
- Suppliers who sell non-taxable items under GST regulations
- Entities that exceed the turnover requirement for composition scheme eligibility
- Companies that supply goods through e-commerce operators.
c.Advantages of Using the GST Composition Scheme
Choosing the composition scheme has a number of advantages, including:
- Compliances Have Been Simplified:
We have decreased the stress of many compliances such as submitting taxes, keeping large record books, and generating invoices, allowing business operations to run more smoothly.
- Tax Payments Every Quarter:
Businesses can make quarterly tax payments, relieving the pressure of monthly levies and allowing for more sustainable cash flow management.
- Tax Liability Is Limited:
The composition scheme limits tax liability to a defined percentage of turnovers, offering predictability and assisting with financial planning.
- Increased Liquidity:
With lower tax rates, firms can keep a larger share of their earnings, resulting in increased liquidity for operational and expansion needs.
Choosing the composition scheme thus provides a more convenient compliance experience, periodic tax payments, reduced tax burden, and increased financial freedom.
d.The GST Composition Scheme’s Drawbacks
While the composition scheme has its merits, it also has several drawbacks, including:
- Geographical Restrictions:
Participation in the composition system limits enterprises’ ability to conduct interstate transactions, potentially limiting market reach and growth opportunities.
- Input Tax Credit is not available:
Input tax credits are not available to composition dealers, which may have an influence on cost efficiency and competitiveness in the long run.
- Certain Goods Are Ineligible:
Businesses subject to the composition system are barred from selling non-taxable things, such as alcohol and merchandise, through e-commerce platforms, potentially limiting the products they can offer.
While the composition system simplifies some things, these drawbacks should be carefully examined when deciding its viability for a specific business.
- Certain Goods Are Ineligible:
Businesses subject to the composition system are barred from selling non-taxable things, such as alcohol and merchandise, through e-commerce platforms, potentially limiting the products they can offer.
While the composition system simplifies some things, these drawbacks should be carefully examined when deciding its viability for a specific business.
7. GST Rates Under the Composition Scheme
Businesses and people who register under the composition system must pay GST rates ranging from 1% to 6%, depending on the nature of their commercial activity. The applicable GST rates under the composition scheme maintain a balanced distribution of SGST/UGST and CGST, with 1% GST including 0.5% CGST and 0.5% SGST/UGST and 6% GST including 3% SGST/UGST and 3% CGST.
The GST rates under the composition scheme are classified as follows:
- 1% of turnover for registered traders and other eligible suppliers under the composition program.
- Manufacturers, with the exception of those dealing in products ineligible for the GST composition scheme, must pay 2% of their total revenue.
- 5% of total revenue for restaurant services.
- 6% of total revenue for enterprises providing or combining services, excluding restaurant services. This rate change went into effect on April 1, 2019.
Apart from restaurants, the inclusion of service sector enterprises in the composition scheme was announced at the 32nd GST Council Meeting. The composition system was expanded to include services and mixed services on April 1, 2019. Prior to this change, service-related businesses and people were unable to participate in the GST composition scheme.
8. Startup decision-making aspects
Startup Decision Factors
Starting a new business is a thrilling but challenging endeavor. Making well-informed decisions at each stage of your startup journey is critical to increasing your chances of success. Here are some essential variables of choice that every company should take into account:
a.Market Analysis:
- Conduct extensive market research to discover your target audience, understand their wants, and gauge demand for your product or service.
- Examine your competition to uncover market gaps and potential points of differentiation.
- Refine your business idea and value proposition using data and customer feedback.
b.Model of Business:
- Choose the best business model for your product or service. E-commerce, subscription-based, marketplace, SaaS (Software as a Service), and other options are available.
- Decide on your revenue sources and pricing plan.
c.Legal Framework:
- Determine your company’s legal structure, such as sole proprietorship, partnership, LLC (Limited Liability Company), or corporation. Each has distinct tax ramifications and liability safeguards.
- Consult a legal expert to ensure compliance with local rules and the protection of intellectual property.
d.Strategy for Funding:
- Evaluate the finance requirements of your startup and examine various funding options such as bootstrapping, personal savings, loans, angel investors, venture capitalists, crowdfunding, and grants.
- Choose the funding option that best fits your company’s objectives and growth ambitions.
e.Building a Team:
- Create a strong and complementary staff with the talents and expertise needed for your business plan.
- As needed, consider co-founders, employees, advisors, and freelancers.
f.Product Creation:
- Create a minimum viable product (MVP) or prototype to put your concept to the test with real users.
- Iterate and improve your product or service in response to user input and market developments.
g.Branding and marketing:
- Create a distinct brand identity and marketing approach.
- Decide on your online and offline marketing channels, which may include social media, content marketing, SEO, email marketing, and advertising.
h.Financial Administration:
- Make a reasonable budget and financial projections.
- Keep a close eye on your cash flow to guarantee you have enough funds to function and expand.
- To maximize profitability, use excellent financial management practices.
i.Compliance with regulations:
- Learn about the legal and regulatory standards that apply to your sector and location.
- Ensure that tax laws, permits, licenses, and industry-specific rules are followed.
j.Infrastructural and technological advancements:
- Invest in the technology, software, and infrastructure required to support your operations and expansion.
- Take into account cybersecurity measures to protect sensitive data.
k.Customer Retention and Acquisition:
- Create a customer acquisition strategy to acquire your first users.
- Use customer retention methods to foster long-term relationships and loyalty.
l.Scaling Strategies:
- Have a clear strategy in place for scaling your firm as it grows. This includes increasing the size of your team, operations, and customer base.
- Consider foreign expansion if it is suitable for your company.
m.Risk Evaluation and Mitigation:
- Identify potential risks and obstacles that your startup may face and devise mitigation solutions.
- Prepare for unforeseen circumstances by making contingency plans.
n.Key Performance Indicators (KPIs) and Metrics:
- Define and track appropriate metrics and KPIs to assess your startup’s success and performance.
- Make informed decisions based on data-driven insights, and pivot as needed.
o.Long-Term Goals:
- Create a long-term vision for your startup that includes your ultimate goals and ambitions.
- To ensure consistency and attention, align short-term decisions with your long-term vision.
p.Adaptability:
- Be adaptable to changing market conditions and client input.
- If necessary, don’t be hesitant to change your business model or approach.
q.Relationships and networking:
- Create a strong network of mentors, advisors, colleagues in the sector, and possible partners.
- Use these connections to get advice, assistance, and opportunities.
r.Work-Life Integration:
- To maintain a healthy work-life balance, prioritize your physical and mental well-being.
- Set boundaries and practice self-care to avoid burnout.
s.Considerations for Legal and Ethical Compliance:
- Maintain integrity and ethics in your business by adhering to ethical ideals and legal norms.
t.Strategy for Exit:
- Consider your long-term exit strategy, whether it is to sell the company, go public, or pass it on to a successor.
9. Conclusion
Choosing the correct GST scheme for your startup is a vital decision that can have a big influence on the financial health and compliance needs of your company. Before making a decision, it is critical to do a thorough review of your startup’s turnover, sort of business, interstate activities, ITC requirements, compliance capability, and growth predictions.
Remember that the GST plan that works best for your startup may not be the greatest fit as your business grows. Review your GST scheme on a regular basis and make changes as needed to line with the changing needs of your business. Seeking professional assistance in understanding the complexity of the GST system and ensuring that your startup remains compliant and competitive in the market can be invaluable. Explore gstman.com for more information
Reference links :
1. A Comprehensive Guide to the GST Composition Scheme
https://www.indiafilings.com/learn/gst-composition-scheme-a-comprehensive-guide/
2. GST in India
https://payu.in/blog/register-small-business-startup-under-gst/
