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The GST Act has been passed last week, and economic pundits are watching out to see how GST affects small businesses, especially women entrepreneurs.
GST has long been considered a panacea for all ills that plague the Indian economic system.
India has an extremely complicated tax regime. Sales Tax, Value Added Tax, Excise, Octroi (Tax on inter-state movement of goods), and multiple surcharges are just some of the taxes that Indian business professionals bear.
The complexity of tax filing and the impact of tax reforms especially affects business women, who run boutique enterprises from their homes or small stores. More often than not, women entrepreneurs specialize in functional and managerial skills that enable them to run their business smoothly, but might resort to outsourcing of tax management to Chartered Accountants or other professionals.
It is important that these women entrepreneurs are cognizant of the changing landscape that is promised by GST, and how GST affects small businesses.
Most taxes were applicable on the manufacturing sector, which usually consists of large and mid-sized corporations. With the introduction of the Goods and Services Tax (GST), the government is pushing the agenda of “One India, One Tax”. GST is a uniform indirect tax on both goods and services from the beginning of the business cycle to its end point.
The GST hence firstly affects small businesses which are mostly service oriented by bringing them into the ambit of taxation. Besides this objective of increasing the tax base, GST also brings into its fold reduction of cascading tax.
Cascading tax refers to a tax on tax. When a small business purchases some goods and pays 10% tax on it and sells it to the next person in the supply chain, the next business ends up paying a 10% tax on the goods and a 10% tax on the taxed portion of the previous amount.
The primary benefit of GST is that it allows businesses to take benefit of this input tax, i.e. cascading tax, as businesses get Input Tax Credit. This is a boon for small entrepreneurs including women entrepreneurs, whose effective rate of tax is lowered, as they get to avail the benefit of input tax credited, and avoid paying up for Double Taxation.
In terms of compliance of GST rules, small businesses no longer have to deal with multiple taxes. However, small businesses will need to have clear invoice-by-invoice updates for every transaction to avail the benefits posed by GST.
This effectively, means that small businesses will have to increasingly organize their businesses and formalize their processes to ensure compliance with GST norms and avail benefits.
It is clear, thus, that the key objectives of the government in pushing this forward is to bridge the gap between the organized and the unorganized sector. In fact, organized firms cannot avail of the benefits of Input tax credit, if the preceding business in the supply chain (usually a small business) does not maintain sacrosanct records and compliance.
The execution of a one-tax regime is full of hurdles in a chaotic and diverse nation like India. However the government aims to have a fully integrated, technological back-end that will make processing of the tax easier. A robust functioning technology system and the ease of use for businesses will make all the difference.
The GST Bill brings efficiency in product costs (especially due to lowered effective tax in the market), but also leads to significant costs and time investment in regulation management, and compliance.
Though the Government hopes that the simplified regime will encourage businesses to pay taxes (thereby filling tax coffers), it might also lead to a situation where small businesses circumvent tax for fear of past tax history being exposed.
Small businesses are already wary of GST as it seeks to do away with kacha or fake bills, which were the mainstay of small business operations so far. Income tax for small entrepreneurs might also be bought under the radar in case of inconsistency with business incomes and expenses.
It is harder for women entrepreneurs to negotiate this as among businesses, it is generally not considered women’s work to partake in negotiation of bills, and deal with middlemen and suppliers. Hence, it is presumed that women entrepreneurs will benefit from the digitization and organization of operational processes.
The organization and digitization that is part and parcel of the Goods and Service Tax regime will also bring to light a lot of inconsistencies in income tax paid by small entrepreneurs.
This is a worrying thought for small entrepreneurs who are tax-wary in the first instance and have a historical background of evading or misquoting tax figures. However, analysts believe that there will be no retrospective effect on small businesses because of the GST regulations, and sign up will begin on a fresh note.
Another critical area in how GST affects small businesses is inflation. Since GST will decrease effective rate of taxes on the manufacturing sector, and increase tax base and tax on service sector goods, it is difficult to clearly ascertain the impact that GST will have on inflation. However, global practices show us that GST has helped in reduction of inflation, especially in the longer run.
Goods and Services Tax will significantly reform the landscape of Indian Business. It is a mammoth process of overturning years of convoluted tax regime. However, GST affects small businesses considerably and can aid in formalizing and structuring not just taxation but business practices as a whole.
GST is perhaps the largest reform since the era of liberalization, privatization and, globalization. The repercussion of how GST affects small businesses and women entrepreneurs is something only time will tell. Till then, however small business owners must stay updated with the changing dynamics and regulations.
Goods and Services Tax might be a small amendment in terms of tax regulations, but it is a giant leap in attempting to organize Business practices in the country.
Women entrepreneurs are admirable for their persistence in navigating the challenging waters of business in India. Managing business regulation and smooth operations is a deciding factor between a successful and unsuccessful business.
It is hoped that GST, with its simplified and digitized structure will help small businesses adapt to the tax regime. The ease in navigating the maze of taxation will enable small businesses to contribute more to the economy, especially women entrepreneurs who have multiple social pressures to deal with as well.
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