Common FAQs About GST for Small Business Owners
Since its introduction in 2017, the Goods and Services Tax (GST) has become a cornerstone of India’s taxation system. However, small business owners often grapple with the complexities of GST compliance. This blog answers some of the most common questions about GST to help small business owners understand and navigate the tax regime effectively. With relatable Indian examples, let’s address these FAQs one step at a time.
1. What is GST, and Why Was It Introduced?
GST is a single, unified tax that replaced multiple indirect taxes like VAT, service tax, and excise duty. It is levied on the supply of goods and services and is designed to simplify India’s complex tax structure.
Example:
Before GST, a manufacturer in Mumbai paid excise duty, VAT, and CST. Now, all these taxes are consolidated into GST, reducing compliance burdens.
2. Who Needs to Register for GST?
GST registration is mandatory for:
Businesses with annual turnover exceeding ?40 lakhs (goods) or ?20 lakhs (services).
Inter-state suppliers.
E-commerce operators.
Casual taxable persons and non-resident taxable persons.
Example:
A small bakery in Delhi earning ?50 lakhs annually must register for GST. However, a smaller bakery with ?30 lakhs turnover can opt out.
3. What Are the Different Types of GST?
GST is divided into four types:
CGST (Central GST): Collected by the central government.
SGST (State GST): Collected by the state government.
IGST (Integrated GST): Levied on inter-state transactions.
UTGST (Union Territory GST): Applicable in union territories without a legislature.
Example:
If a furniture maker in Rajasthan sells goods to a customer in Gujarat, IGST is applied. For sales within Rajasthan, CGST and SGST are levied.
4. What Is the Composition Scheme, and How Does It Work?
The Composition Scheme is designed for small businesses with turnover up to ?1.5 crore. Under this scheme:
Tax is paid at a lower, fixed rate.
ITC cannot be claimed.
Compliance requirements are simplified.
Example:
A clothing retailer in Pune with ?1 crore turnover opts for the composition scheme and pays 1% GST on their turnover instead of regular GST rates.
5. How Do I File GST Returns?
GST returns are filed online through the GST portal. The frequency depends on your registration type:
Regular taxpayers: Monthly GSTR-1 and GSTR-3B.
Composition scheme taxpayers: Quarterly returns.
Example:
A service provider in Bengaluru files GSTR-3B monthly to report their tax liability and GSTR-9 annually for reconciliation.
6. What Is Input Tax Credit (ITC), and How Does It Work?
ITC allows businesses to reduce their GST liability by claiming credit for taxes paid on inputs.
Example:
A mobile shop in Chennai buys phones worth ?10 lakhs (with ?1.8 lakhs GST) and sells them for ?15 lakhs (with ?2.7 lakhs GST). The shop can claim ?1.8 lakhs as ITC, paying only the net ?0.9 lakh GST.
7. What Are GST Rates for Common Goods and Services?
GST rates are divided into slabs: 0%, 5%, 12%, 18%, and 28%.
Examples:
0%: Fresh fruits and vegetables.
5%: Packaged food items and footwear below ?1000.
12%: Processed foods.
18%: Electronics like smartphones.
28%: Luxury items like cars.
8. What Is an E-Way Bill, and When Is It Required?
An E-Way Bill is required for the transport of goods worth over ?50,000. It ensures compliance during transit.
Example:
A dairy in Ahmedabad shipping products worth ?1 lakh to Surat must generate an E-Way Bill for the transport.
9. What Happens If I Don’t Register for GST?
Failure to register for GST can lead to penalties:
10% of the tax amount (minimum ?10,000).
100% of the tax is due in cases of deliberate evasion.
Example:
A trader in Jaipur crossing the turnover threshold but avoiding registration is fined for non-compliance.
10. Can I Cancel My GST Registration?
Yes, GST registration can be canceled in cases like business closure or turnover falling below the threshold. Apply online through the GST portal.
Example:
A seasonal trader in Himachal Pradesh opts to cancel their registration after business operations cease post-tourism season.
11. What Are GST Compliance Ratings?
The GST compliance rating is a score given to businesses based on their adherence to GST rules. Higher ratings improve trustworthiness among vendors and customers.
Example:
A transport company in Kerala with timely filings and zero discrepancies enjoys a high compliance rating, attracting more clients.
12. How Does GST Impact Small Businesses?
Advantages:
Simplified tax structure.
Elimination of cascading tax effect.
Increased competitiveness.
Disadvantages:
Initial compliance burden.
Frequent rule changes.
Example:
A local sweet shop in Lucknow benefits from simplified taxes but struggles initially with regular filings.
13. What Are GST Notifications, and How Do They Affect Businesses?
GST notifications are updates issued by the government, including changes in rates, filing procedures, or exemptions.
Example:
A small cafe in Chandigarh adjusts its billing system after a notification reduces GST on restaurant services from 18% to 5%.
14. What Are Reverse Charge Mechanisms in GST?
Under reverse charge, the recipient, not the supplier, pays GST. This applies to specific goods, services, and unregistered supplier transactions.
Example:
A registered company in Kolkata hiring a lawyer must pay GST under reverse charge, as legal services fall under this mechanism.
15. How Can Small Businesses Stay Updated on GST?
Subscribe to government newsletters.
Follow GST experts and tax professionals.
Use GST software for compliance.
Example:
An online bookstore in Hyderabad uses accounting software that automatically updates GST rates and filing deadlines.
Conclusion
Understanding GST is crucial for small business owners to ensure compliance and leverage benefits like ITC. By addressing common concerns and keeping up with updates, small businesses can navigate GST effectively, enhancing their growth and reputation in the Indian market.