GST - Caution for small traders and start ups

GST is going to be a reality soon and it is going to impact almost each and every person who is in business. Large organizations are gearing up with the GST and adjusting their books accordingly. GST is also going to impact the small traders and startups with turnover of Rs.50 lakhs.

The GST has proposed composition scheme where the small traders and startups have to pay tax at 1% - 2% on the total turnover but with lesser compliances. The concept of composition scheme is to provide ease of doing the business. However, under the GST, the composition scheme is technical in nature and a mistake attracts penalty.

Following are the mistakes / constraints of the composition scheme where there is possibility of penalty.

1. Permission for composite scheme

If you want to avail the benefit of composition scheme, i.e. lower tax rate and lesser compliance, then it is required to be first applied for it. Once applied, the same cannot be changed during the year. The choice of benefit has to be decided at the beginning of the year and thereafter continue throughout the year.

2. Interstate purchase / Sales

Suppose a trader has turnover of Rs.40 lakhs and thus has opted for composite scheme and pays tax @1% which amount to Rs.40000. Now the trader makes interstate purchase of Rs. 1000 from a registered supplier. Now as per the law the composition scheme will cease to exist and the person will be liable to pay standard rate @18%. The trader has to pay the tax as well as penalty (which is equivalent to tax) and also for non-filing of return. So even the small trader has to be proactive and has to take every precaution. Otherwise, it will be tough for a small business when taxes are required to be paid.

3. Not for casual registration

Many a times people start their business with the local registration process like shop & establishment, PAN, TAN etc and then go for other registrations gradually. As per the law they are not mandatorily covered under GST and hence, not liable for the composite scheme. So the startups has to make assessment of their turnover to apply for the composite scheme.

4. Consideration of limit for composition scheme

As per the composition scheme, any amount over & above the limit specified as Rs.50 lakhs is taxed under the standard rate. In case of a trader, if the total supply made during the year is Rs. 45 lakhs also he provided some goods as gifts to the family of the supplier and his customers worth Rs. 7 lakhs during festivals and free gifts. Thus, as per the books of trader, total turnover is considered as Rs.45 lakhs. However, as per GST law, total turnover will be considered as Rs.52 lakhs as supplies includes supply without consideration. Thus, the consequences will be the trader will cease to be covered under composition scheme, trader would be liable to pay tax at the standard rate with penalty which is equivalent to tax amount, penalty for not filing of return amounting to Rs.5000 per return.

This ignorance can be detrimental to the business.

5. Reverse charge mechanism

Under the GST, the concept of reverse charge, i.e. opposite to regular charge, comes into play. The basic rule under the GST is that the person who is a supplier of goods and services will be liable to pay to the government. This is totally opposite to the regular basic rule when the government notifies some cases where the recipient of goods or services will be liable to pay taxes. Hence, even the person covered under the composition scheme will be liable to pay taxes at the standard rate and not at a discounted composite rate of 1% or 2%. Furthermore, this will only add to their cost, as they cannot claim it as input tax credit.

6. Not filing return on time

As a general trend, earlier many startups and small businesses either did not file returns on time or did not file them at all. Now with the GST, there is going to be complete transformation. Return has to be filed if the trader is dealing with registered dealer. One needs to file return on time to avoid the late fees and fines. The late fees penalty is Rs.100 per day subject to Rs.5000 per return.

7. Claiming input tax credit

The primary condition of availing the benefit of the composition scheme is that no input credit will be available. However, this is a lesser-known fact and tends to create a problem for the business later on.

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