• Mohit Yadav, Founder, Altinfo.

Tax and Business: Musings of a Small Business Owner

In 2015, India ranked 142nd on the Ease of Doing Business Index. Within five years, it had climbed to the 63rd position.[1] The Government of India undertook some major initiatives in taxation to reach here, including the introduction of GST,[2] yet when it comes to paying taxes, India still ranks at 125 amongst the 190 countries.[3]

As lawyers, our fundamental focus primarily revolves around complex intricate questions such as the state’s power to tax and advising on tax-efficient structures. However, the majority of businesses do not face such issues; their issues are very different and exist at a much more primitive stage.

Hopefully, this article will ignite some academic inquiry into some of these lesser explored mechanical aspects of the Indian taxation regime that create issues concerning access and can have a debilitating impact on small businesses.

Starting up?

For a business to become operational, apart from the incorporation of the corporate structure, the second most important registration that is required to be fully operational is that of taxation. In order to offer any service or sell goods, the tax invoices require prior tax registration. The registration for the majority of businesses is under the new GST regime.[4] Certain exceptions have been carved out for smaller businesses and a few other specific instances, but this comes with its own burden. Registered businesses have been disincentivized to receive supplies from unregistered businesses by instituting mechanisms such as the imposition of reverse charge mechanism and the lack of input credits on the supplies.[5]

Considering how critical the tax registration is to the commencement of a business, one would expect it to be quick and straightforward. However, the reality is that the GST portal is frequently mired by controversy due to various technical glitches, making the registration process full of glitches and tiresome. Further, while one would expect that as time progresses, the government would be able to improvise on existing infrastructure, the opposite is happening. The Central Board of Indirect Taxes and Customs increased the time limit for disposal of a registration application from three working days to seven working days in 2020.[6] Further, there are no consolidated manuals or guidelines while applying for GSTIN, making the application process cumbersome and creating an unnecessary reliance on professionals when ideally the process shouldn’t require the same.

This is particularly problematic because of how easy tax registration is under direct taxes for companies and LLPs, where the tax registration is automatically provided when one applies for incorporation of either a company or an LLP.[7]

Working the Hustle?

A large display board - be it in flex, neon or at times even hand painted - outside a shop is the sine qua non for any Indian business. The practice is not only cultural, but is also found in the Indian tax and company legislation which require a business to prominently display such boards outside their place of business.[8] This innocuous requirement at times can lead to serious issues - the absence of the same can lead to cancellation of registration and imposition of financial penalties. For instance, small businesses selling primarily via e-commerce portals such as Amazon had to face the wrath of the taxman in Karnataka, when they had registered Amazon’s warehouse as an additional place of business under the GST regime.[9] Similarly, small digital-first businesses with solo entrepreneurs also often face issues with such requirements as they face issues with landlords raising concerns in putting such boards in a residential society and at times even in obtaining the consent of the landlord for registration for GSTIN.

Most tax policies, especially administrative ones, are devised along similar lines and do not account for the relevant ground level considerations. For instance, the government’s option of allowing unregistered vendors under the GST regime subject to a turnover limit. Now, these small businesses face two kinds of challenges; the first being that that they are not allowed to provide the inter-state supply of goods (interstate services capped at twenty lakh), limiting their ability to grow in this digital world.[10] Second is the issue that their customers not only are deprived of input credit on the supply of goods, but also need to undertake additional compliances.[11]

The current regime does not factor in the unique style of how business is conducted in India. To start with, it is a known fact that payments in India are rarely made on time. A testament to this fact can be gauged from the rise of the new age trends of invoice discounting and automated collections startups, focusing on easing out cash flow and faster receivables. The fact that most Indian businesses do not make payments on time is so mainstream that one of India’s leading retail grocers’ competitive moats in pricing is attributed to its practice of timely clearing all the payables to its vendors.[12] Under the GST regime, in the case of goods, an invoice at the latest can be issued upon delivery of goods, and in case of service, within thirty days of service being rendered.[13] The issue that arises here is that when the invoice is eventually issued, the business owner is liable to pay the GST component for the same, even if the payment will not be received during the same period. Even though for smaller businesses, there exists an option for quarterly filing of GST returns, the option does not exempt them from paying the requisite amount of tax every month.[14] This leads to compliance issues where some businesses start working on the basis of using purchase orders and raising the tax invoices when the client agrees to make the payment, which, though practical, is inconsistent with the law as it stands. Other businesses which raise invoices timely have to suffer in terms of cash flow by having to deposit the GST amount of the invoice from their own funds. If for some reason, the invoice needs to be cancelled for whatsoever reason, additional compliance comes into the picture requiring the issuance of credit/debit note.

Over the years, the system has become antiquated. A lot of compliances have been imposed on businesses and some of them are not even compatible with ground realities. Even when the government intends to help businesses, the policy is not always very well thought out, one example of which could be the exemption of direct taxes on profits for newly incorporated startups during the first five years of operations. This policy is ineffective considering that the majority of startups do not make any profit during the first years of their operation. Even amongst the select few that do make profits, it is very difficult to obtain the coveted tax exemption recognition, and less than 1% of all startups recognized until 2019 had received the status.[15] There is thus a direct need to study the efficacy of every rule and regulation that routinely affects the operations of these small businesses, and to see how they can be optimized to support the growth of this segment - which employs the majority of the workforce in India.[16]

The Good Days

So far, the situation seems bleak. However, it is not as worrisome as the discussion above may one lead to think. There are a lot of effective and sincere developments instituted by the government to assist small and medium businesses and help them grow. All registered businesses under the GST regime can make use of cloud-based accounting solutions free of cost, in perpetuity, by virtue of their GST registration, thus digitalizing their records and substantially reducing their efforts involved in bookkeeping.[17] These tools support the recent imposition of electronic invoicing and audit trail requirements for bookkeeping.[18] The government has also facilitated portals that provide e-commerce opportunities to Indian businesses and has also changed policies that help smaller businesses take part in government tenders.[19] The cross-sharing of data between the Central Board of Direct Taxes, GST Network, and the Registrar of Companies, will lead to a better quality of assessments as well as help identify the evasive taxpayers.[20]

Even the current GST regime, for all its faults, routinely provides extensions for filing of taxes and returns. Under the direct tax regime, the government reduced applicable tax deductions at source rates during Covid to help ease cash flows.[21] The ongoing progress on the faceless regime[22] will make the tax regime much more accessible and uniform, setting aside the discretion of individuals. The new income tax portal on similar lines seeks to streamline all communication at one single dashboard, and also consolidates and prefetches the various sources of income easing the filing process and decreasing the possibility of an unintentional omission.[23]

A lot more needs to be done to make the tax regime not only accessible but also attuned to the needs of the stakeholders that it seeks to serve, especially the taxpayers, who in many ways need to be treated as a service recipient is required to be treated. The proposed policy of treating the ‘taxpayer as a customer’[24] is thus a welcome change in this regard, and if effective tools are put in place that adapt to constant feedback from business owners, the system can be a force for greater good. Bibliography

[1] doj.gov.in. 2021. Enforcing Contracts - Ease of Doing Business. [online] Available at: <https://doj.gov.in/eodb/> [Accessed 28 September 2021]. [2] The Indian Express, 2021. GST rollout: All except J-K pass State GST legislation. [online] Available at: <https://indianexpress.com/article/business/economy/gst-rollout-all-except-jammu-kashmir-pass-state-gst-legislation-4716003/> [Accessed 28 September 2021]. [3] The World Bank. 2021. Doing Business Measuring Business Regulations. [online] Available at: <https://www.doingbusiness.org/en/data/exploreeconomies/india> [Accessed 28 September 2021]. [4] Section 24, Central Goods and Service Tax Act, 2017. [5] Section 9(4), Central Goods and Service Tax Act, 2017. [6] Notification No. 94/2020-Central Tax, dated December 22, 2020. [7] MCA21. 2021. FAQs On SPICe+ Forms. available at: <https://www.mca.gov.in/MinistryV2/spicefaq.html>. [8] Rule 18(2), Central Goods and Service Tax Rules, 2017; Section 12(3), Companies Act, 2013. [9] IndianOnlineSeller.com. 2021. Amazon under the taxmen’s radar again!. available at: <https://indianonlineseller.com/2014/09/amazon-taxmens-radar>. [10] Section 24, Central Goods and Service Tax Act, 2017 [11] Section 9(4), Central Goods and Service Tax Act, 2017 [12]The Economic Times, 2021. 10 secrets behind the stunning success of D-Mart's Radhakishan Damani. available at:<https://economictimes.indiatimes.com/news/company/corporate-trends/10-secrets-behind-the-stunning-success-of-d-marts-radhakishan-damani/articleshow/57755064.cms>. [13] Rule 47, Central Goods and Service Tax Act, 2017 [14] 2021. Frequently asked questions on QRMP scheme. available at: <https://tutorial.gst.gov.in/downloads/news/faq_on_qrmp_iff.pdf>. [15] Indian Express. 2021. Startup India: In 34 months, only 94 of 15,798 govt recognized ventures got tax exemptions. available at <https://indianexpress.com/article/business/startups/startup-india-in-34-months-only-94-of-15798-govt-recognised-ventures-got-tax-exemptions-5593695/>. [16] 2021. MSME Annual Report 2020-21. Ministry of Micro, Small and Medium Enterprises, p.28. available at: <https://msme.gov.in/sites/default/files/MSME-ANNUAL-REPORT-ENGLISH%202020-21.pdf>. [17] GSTN Offers Free Accounting & Billing Software for MSME. available at: <https://tutorial.gst.gov.in/downloads/pressrelease/others/freeaccountingbillingsoftware.pdf>. [18] Business Today. 2021. Govt extends implementation of mandatory audit trail of companies' accounts till Apr 1, 2022. available at <https://www.businesstoday.in/latest/economy-politics/story/govt-extends-implementation-of-mandatory-audit-trail-of-companies-accounts-till-apr-1-2022-292315-2021-04-01>. [19] Public Procurement Policy for Micro and Small Enterprises (MSEs) Order, 2018. available at: < https://msme.gov.in/public-procurement-policy> [20] Notification No. 74/2017 dated 26.07.2017 under Section 138(1)(a) of Income tax Act, 1961. [21] DNA. 2021. COVID-19 Relief: TDS and TCS rates reduced by 25% from May 14, 2020 to March 31, 2021. available at <https://www.dnaindia.com/personal-finance/news-govt-reduce-tds-and-tcs-rates-by-25-percent-during-coronavirus-pandemic-2861809>. [22] Faceless Scheme​​​​​ , Income Tax Portal available at <https://www.incometaxindia.gov.in/Pages/faceless-scheme.aspx>. [23] The Economic Times. 2021. New income tax portal to be launched today: Faster income tax refund, other features and benefits. available at <https://economictimes.indiatimes.com/wealth/personal-finance-news/new-income-tax-portal-to-be-launched-today-faster-income-tax-refund-other-features-and-benefits/articleshow/83301663.cms>. [24] Tax Administration Reform in India Spirit, Purpose and Empowerment (Third Report of TARC) available at <https://www.dea.gov.in/sites/default/files/TARC3rdReport.pdf>.

Cite this Article - Mohit Yadav, Tax and Business : Musings of a Small Business Owner(Tax Terminal Blog, 30th October 2021 ) <https://www.taxterminal.in/post/tax-and-business-musings-of-a-small-business-owner>

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