GST and Compliance as per Indian Legal Framework

Goods and Services Tax In India and Applicability for Startups:

By Sandigdha Mishra, Advocate

advsandigdha@paydirtprofessionals.com

advocate.sandigdhamishra@gmail.com

Goods and Services Tax (GST) is a form of indirect taxation in India which allows merging of existing taxes into single system of taxation. Introduction of GST is a very significant step in the world of indirect taxes in India. By merging large number of taxes into a single tax would mitigate cascading taxation in a major way. With GST, it is anticipated that the tax base will be comprehensive, as all goods and services will be taxable with minimum exemptions. GST will have an impact on almost all the aspects of the business operations in the country. It is considered as one of the most significant and path-breaking tax reforms ever undertaken in the history of independent India, India embraced the Goods and Services Tax (GST), a landmark indirect tax reform from 1 July 2017.

GST is a transaction tax that subsumes most of the legacy indirect taxes levied by the Centre and States. This reform called for a significant realignment of operations including supply chain and logistics, pricing, procurement, accounting, and Information Technology (IT) systems.

A reform of this magnitude takes time to settle down in the overall system as the compliance and legislative processes require continuous amendments to weed-out difficulties. Thus requiring businesses to continuously adapt to the additional requirements necessitated by these amendments.

SALIENT FEATURES OF GST

GST is defined as any tax on supply of goods and services other than on alcohol for human consumption.

GST is applicable on supply of goods or services against the present concept of tax on manufacturing of goods or on sale of goods.

GST will be dual with the centre and states simultaneously levying it on a common base.

An integrated GST is levied on inter-state supply of goods or services, that is, IGST.

Import of goods or services will be treated as inter-State supplies and is subject to IGST in addition to the applicable customs duties.

When introduced in Rajya Sabha, GST bill was in a big controversy. Being avoided by the opposition party, the bill took a very long time to get passed. But, finally is has been passed.

Impact of GST on Startups

The GST will fuel the economy in a big way in the long run, by bringing a stupendous increase in the revenue collected through it and India will rapidly move towards being seen as a “developed” nation. India, as the biggies define it, is still a developing nation, but it is doing so at a supreme pace and a lot depends on the survival and progression of the start-ups and the small business sector. 

While the GST is rolled with a harry audacious goal of simplifying the taxation and strengthening the Indian economy, the initial impact [first 12 months] of GST on different sectors will vary, depending on the change in the tax slabs and various other indirect factors. However, the start-ups will get enough oxygen and should be able to thrive and flourish as the GST enfolds. The GST will overall act as a catalyst for the start-ups and will be a major boon to small and medium enterprises. Having said that, there would also be some barriers and bottlenecks which the industry will face. The article aims to apprise you of all such pros and cons of GST on start-ups to enable you to make an informed decision.

Impact of GST on Positive Side – 

The new consolidated GST and its unique centralized nature has eliminated all the earlier hurdles and hassles of enrolling with a plethora of different indirect taxes of both central and state, only easing the process of beginning a new venture by allowing a single registration applicable to PAN India. Since startups lack the resources to hire tax experts or a dedicated team for handling varied forms of tax compliance, the objective of GST is to simplify the tax regime by reducing the multiplicity of taxes. This will not only bring compliance costs down but also make taxation transparent with digital tax processing. The one nation – one tax has opened up all of India like never before and created a level playing field for everyone. Earlier SMBs used to limit their reach within the state fearing the burden of tax and other complexities on interstate sales. The GST has eliminated this fear and transfer of tax credit [irrespective of the location of the buyer and the seller] in the new regime will encourage the entrepreneurs to look beyond the narrow intra-state business,

The Composition scheme is formulated with the sole objective of supporting the start-ups and empowering the small businesses with an annual turnover between 20 lakhs and 75 lakhs to pay lower taxes. Earlier, as per the Value Added Tax (VAT) structure, any business with a turnover of more than 5 lakhs was to compulsorily get a VAT registration. Under GST, this threshold for registration has been increased to 10 lakhs in a few states, 20 lakhs, and in some cases even 40 lakhs, thus providing a breather for founders of many start-ups and small businesses. GST does not have any provision for ‘entry tax’ for the goods manufactured or sold in any part of India leading to expedited delivery of goods at interstate points and toll checks. A CRISIL report suggests that the manufacturing costs of bulk goods will be reduced enormously, resulting in a boost of e-commerce endeavors.

The cost of compliance, complexities of multiple taxes and tough inter-state movements have all come to a full stop. The singular centralized taxation consolidates the majority of the previous taxes and cuts down the ultimate load on the taxpayer. The digital bookkeeping and the GST Compliance Rating will enable the newbies to fulfill eligibility criteria to avail credit facilities and will attract more investors in the light of transparent, sound and authentic e-data. In the long run, FinTech organizations and venture capitalists will have easy access to the young and fast-growing ventures digitally and confidently partner with them, in the light of visible authentic history.

Impact of GST on Negative Side:

The GST laws state that any business with an annual turnover of 20 lakhs [exempting northeast states, where this threshold is 10 lakhs] or more is required to register for GST and gives an impression that anyone below the mentioned limit is exempted from registering.  But, any venture, if making any inter-state transaction is required to register for GST and file returns, irrespective of his annual turnover being below 20 lakhs. The distance of the inter-state is immaterial and could be as close between Noida and Delhi. Though Composition Scheme is aimed to empower the smaller businesses [20 LPA to 75 LPA], it prohibits the availing of input tax credit and also the collection of any tax from the recipients. While the GST rate [1% for manufacturer, 5% for a restaurant service provider and 1% for other suppliers] for composition scheme is considerably lower than that applicable for a regular normal taxpayer, if one were to take into account the restrictions imposed, it would appear to bring such taxpayers back to square one. The composite taxpayers would be deprived of the inter-state business and cannot sell through e-commerce, since GST needs e-commerce to operators to collect TDS. The new generation taxation mechanism would need to uphold funds in the electronic form with the tax department leading to a blockage of the capital. Additionally, the input tax credit mechanism will also lead to choked capital. All in all, the businesses would have to part with a portion of their working capital funds [without the benefit of interest] under GST.

A numerical figure [GST Compliance Rating] will guide your prospective buyer to decide upon your credibility with the government much like the personal credit score these days. Businesses will do everything to get and keep a ‘good’ score, which is not that easy, seeing the stringent online micro guidelines not only about entering the data but also about payments. The ‘good’ credit score would come at a cost of specifically deployed bandwidth and funds. GST being a 100% online module will need skills and precision to achieve the level of accuracy needed for obtaining a high GST Compliance Rating and will also have to depend upon the intermediaries [GSPs and ASPs]. Such recurring services would certainly hit the bottom line profitability of the startups and the SMBs. If a small businessman, who is exempted from GST supplies to a GST registered entity, the buyer is liable to pay GST on such a purchase by self-invoicing and this invoice is to be uploaded at GSTN while filing returns. Such a cost is basically bad debts for the purchaser.

Anyone who intermittently transacts [goods/services/both] in the course or continuance of business, whether as a principal, agent, or in any other capacity, in a state or union territory where he has no fixed place of business, also needs to register for GST. Other than the GST, such an entity would also have to pay taxes on an estimated basis, while applying for registration.

From critical analysis, the GST aims to simplify and enhance transparency with digital tax processes. For the start-ups, a DIY [Do It Yourself] model is also deployed [although with restricted functionalities], which will enable the newbies to register, submit returns, pay taxes and claim returns online. This will be advantageous for all sorts of start-ups irrespective of any sector.

GST Compliance

A startup running as a private limited company has to follow numbers of compliance as laid down by various statutes and other regulatory bodies. These include but are not limited to the periodic filing of tax and other returns, holding the board and other meetings, maintaining statutory books and accounts etc.

Latest update as on 20th March 2020

1. MCA has announced the exemption of physical Board Meetings of the companies until 30th June 2020 for the matters such as the approval of financial statements, Board report, restructuring, etc.

2. Companies and LLPs are advised to implement ‘Work from Home’ policy till the 31st of March 2020, at the headquarters and the field offices across India. Staggered timings may be followed to reduce any physical interactions among the essential staff on duty.

3. A simple web form CAR 2020 is advised to be submitted by the authorised signatory of every company/LLP starting from the 23rd of March 2020 on the MCA website.

Registrar related Compliance

Appointment of Auditor-  (E-form ADT-1)

* First Statutory Auditor has to be appointed within 30 days of incorporation in first board meeting

* Subsequent auditors will be appointed for 5 years in AGM.

Form ADT-1 is filed for a 5-year appointment. After that every year in AGM, Shareholder ratify the Auditor but there is no need to file ADT-1.

Holding Board Meeting

* First meeting within 30 days of incorporation 

* Minimum 2 meetings, one in each half calendar year.

  Minimum gap of 90 days is required between 2 meetings (ignore if more than 2 meetings held during the year)

Holding Annual General Meeting(AGM) One AGM Maximum gap of 15 months between 2 AGMs

E- Forms Filing Requirements E-form: MGT-7 File Annual Return within 60 days of holding of AGM for the period 1st April to 31st March.

E-form: AOC-4 File Financial Statement: i.e Balance Sheet along with Statement of Profit and Loss Account and Directors’ Report

Form MBP- 1 Every Director of the Company in First Meeting of the Board of Director in each Financial Year needs to disclose his interest in other entities by filing the form Fresh MBP-1 needs to be filed, whenever there is change in his interest from the earlier given MBP-1

Form DIR – 8 Every Director of the Company in each Financial Year has to file with the Company disclosure of non-disqualification

Directors’ Report Directors’ Report is to be filed covering all the information required for Small Company under Section 134. It should be signed by the “Chairperson” authorized by the Board, where he is not so authorized by at least 2 Directors.

Statutory registers and books of accounts

1)Statutory Registers

 2)Minutes Book 

 * Board Meeting Minutes Book

 * General Meeting Minutes Book (i.e. AGM, EGM, Postal Ballot, Creditors Meetings, Debenture holders Meetings) 

3. Books of Accounts/Financial Statements(section 44aa) 

4)Register of Directors Attendance at Board/Committee Meetings.

Circulation of Financial Statement & other relevant Docs Company will send to the members of the Company approved Financial Statement, Directors’ Report and Auditor’s’ Report at least 21 clear days before the Annual General Meeting.

Note: Above mentioned Compliance are mandatory yearly compliances for the Small Private Limited Company. Except above compliances, there may be event-based compliances for the Small Company. For further details read here.

Other Statutory compliances of such private limited companies revolve around periodic filing of tax and other returns, maintenance of books under Income-tax Act and other statutes as applicable etc. The compliance requirement differs from a case to case basis depending upon nature of the business, product or service provided, the volume of turnover etc.

Non-Registrar compliance

Payment of periodic dues (GST Liability, TDS & TCS payment)

B. Non-Registrar compliance=”font-weight: 400;”>of periodic returns – (Monthly, quarterly, annual returns- GST, TDS, etc)

Monthly/Quarterly GST Returns

Quarterly TDS Returns

Assessment of advance tax liability and payment of advance tax periodically

Filing of Income Tax Returns (Tax will be payable at a flat rate of 30% plus Education Cess)

Filing of Tax Audit Report

Regulatory Assessment of business under different acts of law (Eg. Environment and Protection Act, Money Laundering Act, Competition Act, Factory Act etc.)

Often entrepreneurs get overwhelmed by the number of compliances and in absence of professional guidance end up paying interest and penalties.

GST filings as per the CGST Act subject to changes by CBIC Notifications

 

Return Form	Description	Frequency	Due Date
GSTR-1	Details of outward supplies of taxable goods and/or services affected.	Monthly	11th* of the next month with effect from October 2018 until September 2020. *Previously, the due date was 10th of the next month.
		Quarterly  (If opted under the QRMP scheme)	13th of the month succeeding the quarter. Was end of the month succeeding the quarter until December 2020)
GSTR-2 Suspended from September 2017 onwards	Details of inward supplies of taxable goods and/or services effected claiming the input tax credit.	Monthly	15th of the next month.
GSTR-3 Suspended from September 2017 onwards	Monthly return on the basis of finalisation of details of outward supplies and inward supplies along with the payment of tax.	Monthly	20th of the next month.
GSTR-3B	Simple return in which summary of outward supplies along with input tax credit is declared and payment of tax is affected by the taxpayer.	Monthly	20th of the next month from the month of January 2021 onwards^ Staggered^^ from the month of January 2020 onwards upto December 2020.* *Previously 20th of the next month for all taxpayers.
		Quarterly	22nd or 24th of the month next to the quarter***
	^20th of next month for taxpayers with an aggregate turnover in the previous financial year more than Rs 5 crore or otherwise eligible but still opting out of the QRMP scheme. ^^ 1. 20th of next month for taxpayers with an aggregate turnover in the previous financial year more than Rs 5 crore. 2. For the taxpayers with aggregate turnover equal to or below Rs 5 crore, 22nd of next month for taxpayers in category X states/UTs and 24th of next month for taxpayers in category Y states/UTs  ***For the taxpayers with aggregate turnover equal to or below Rs 5 crore, eligible and remain opted into the QRMP scheme, 22nd of month next to the quarter for taxpayers in category X states/UTs and 24th of month next to the quarter for taxpayers in category Y states/UTs  Category X: Chhattisgarh, Madhya Pradesh, Gujarat, Maharashtra, Karnataka, Goa, Kerala, Tamil Nadu, Telangana or Andhra Pradesh or the Union territories of Daman and Diu and Dadra and Nagar Haveli, Puducherry, Andaman and Nicobar Islands and Lakshadweep. Category Y: Himachal Pradesh, Punjab, Uttarakhand, Haryana, Rajasthan, Uttar Pradesh, Bihar, Sikkim, Arunachal Pradesh, Nagaland, Manipur, Mizoram, Tripura, Meghalaya, Assam, West Bengal, Jharkhand or Odisha or the Union Territories of Jammu and Kashmir, Ladakh, Chandigarh and New Delhi.
CMP-08	Statement-cum-challan to make a tax payment by a taxpayer registered under the composition scheme under section 10 of the CGST Act (supplier of goods) and CGST (Rate) notification no. 02/2019 dated 7th March 2020 (Supplier of services)	Quarterly	18th of the month succeeding the quarter.
GSTR-4	Return for a taxpayer registered under the composition scheme under section 10 of the CGST Act (supplier of goods) and CGST (Rate) notification no. 02/2019 dated 7th March 2020 (Supplier of services).	Annually	30th of the month succeeding a financial year.
GSTR-5	Return for a non-resident foreign taxable person.	Monthly	20th of the next month.
GSTR-6	Return for an input service distributor to distribute the eligible input tax credit to its branches.	Monthly	13th of the next month.
GSTR-7	Return for government authorities deducting tax at source (TDS).	Monthly	10th of the next month.
GSTR-8	Details of supplies effected through e-commerce operators and the amount of tax collected at source by them.	Monthly	10th of the next month.
GSTR-9	Annual return for a normal taxpayer.	Annually	31st December of next financial year.
GSTR-9A (Suspended)	Annual return optional for filing by a taxpayer registered under the composition levy anytime during the year.	Annually until FY 2017-18 and FY 2018-19	31st December of next financial year, only up to FY 2018-19.
GSTR-9C	Certified reconciliation statement	Annually	31st December of next financial year.
GSTR-10	Final return to be filed by a taxpayer whose GST registration is cancelled.	Once, when GST registration is cancelled or surrendered.	Within three months of the date of cancellation or date of cancellation order, whichever is later.
GSTR-11	Details of inward supplies to be furnished by a person having UIN and claiming a refund	Monthly	28th of the month following the month for which statement is filed.

* Subject to changes by Notifications/ Orders

** Statement of self-assessed tax by composition dealers – same as the erstwhile form GSTR-4, which is now made an annual return with effect from FY 2019-2020 on wards.

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