The Goods and Services Tax (GST) is one of the most transformative tax reforms in India, and it aims to create a unified tax structure, eliminate cascading taxes, and promote transparency in the business environment. Whether or not small businesses and entrepreneurs are required to register for GST is one of the most commonly asked questions. Although there are several advantages to registering for GST, there are also cases in which it is mandated by law. To guarantee compliance and prevent fines, small businesses have to understand when and why they should register for GST.
What is GST?
GST is a consumption-based tax that is levied on the supply of goods and services. It is a single tax that was brought by the Government of India to replace multiple indirect tax system that includes VAT, service tax, excise duty, and others, making it simpler for businesses to comply with tax regulations. The introduction of GST has significantly reduced the tax burden on the people of India by eliminating the cascading effect, where tax is levied on tax, which was common under the previous tax regime.
GST has three main components:
- Central GST (CGST): It is imposed by the central government.
- State GST (SGST): It is imposed by the state government.
- Integrated GST (IGST): It is imposed on the inter-state transactions.
GST allows businesses to claim input tax credit (ITC) for taxes paid on inputs, which they can set off against their output tax liabilities. This provides a major advantage to businesses, particularly in reducing the overall tax burden.
When is GST Registration Mandatory for Small Businesses?
The need for GST registration depends on various factors, such as turnover limits, the nature of business activities, and the types of goods and services provided.
Turnover Limit
The Government of India has prescribed a turnover limit for mandatory GST registration. This limit is dependent on the type and location of the business.
A threshold limit is essential for small businesses to determine whether GST registration is mandatory for them or not.
For Goods Suppliers:
GST registration is mandatory for the business involved in the supply of goods whose aggregate turnover is ₹40 lakhs in a financial year. For businesses located in special category states (such as Jammu & Kashmir, Himachal Pradesh, Uttarakhand, and the northeastern states), this limit is ₹20 lakhs.
For Service Providers:
GST registration is mandatory for the business engaged in the supply of services whose aggregate turnover is ₹20 lakhs in the financial year. For most states like Arunachal Pradesh, Assam, Meghalaya, Manipur, Mizoram, Tripura, Uttarakhand, Jammu Kashmir, etc. the turnover is ₹10 lakhs.
This means that if a small business has a turnover below the prescribed limits, it is not required to register for GST. However, the business may still choose to voluntarily register for GST, which can offer several advantages, as discussed below.
Interstate Supply of Goods or Services
Even if a small business’s turnover is below the prescribed threshold, it must register for GST if it makes inter-state sales of goods or services. In other words, if your business supplies goods or services across state borders, regardless of turnover, GST registration is mandatory.
Online Sales and E-Commerce
If you are a small business and want to sell your product or services online on the e-commerce platform, then you are required to have a GST number. E-commerce platforms such as Amazon, Flipkart, or other online marketplaces are required to obtain GST registration. The platform itself may require sellers to provide GST registration details before listing their products.
Casual Taxable Persons or Non-Resident Taxable Persons
Certain categories of businesses, like casual taxable persons or non-resident taxable persons, must also obtain GST registration regardless of turnover. A person who periodically engages in taxable activities but lacks a permanent place of business in India is known as a casual taxable person. Non-resident taxable persons are foreign businesses that provide taxable goods or services in India. These businesses must register for GST before starting their operations in India.
When is GST Registration Not Required?
While many small businesses need to register for GST, there are certain instances where GST registration is not mandatory. Here are some key exemptions:
- Small Businesses with Turnover Below Threshold Limits: As mentioned earlier, businesses whose annual turnover is below the prescribed limit do not need to register for GST unless they are engaged in interstate supply, e-commerce, or certain other specified activities.
- Exempted Goods and Services: Certain goods and services are exempted from GST under the GST law. If a small business deals exclusively in these exempt goods or services, it may not be required to register for GST. Examples include certain agricultural products, health services, educational services, and public transport services.
- Businesses Registered Under Composition Scheme: Small businesses with a turnover below ₹1.5 crore (₹75 lakhs for special category states) can opt for the Composition Scheme under GST. Businesses opting for this scheme are required to pay tax at a reduced rate (usually 1%, 2%, or 5%, depending on the type of business) and do not have to charge GST on their sales. However, they are not eligible for input tax credit.
- Exporters: If a small business is solely engaged in exporting goods or services, GST registration is not mandatory, as exports are generally zero-rated under GST. However, exporters may still choose to register voluntarily to avail of input tax credits.
Benefits of GST Registration for Small Businesses
Though GST registration is not mandatory for a small business, registering the GST number voluntarily can provide several benefits, some of which are listed below:
- Input Tax Credit (ITC)
The most important advantage that GST registration brings to small businesses is that you can claim an input tax credit (ITC) on business-related purchases. This means that small businesses can offset the GST paid on inputs (raw materials, goods, and services used in the business) against the GST collected on their sales. This helps reduce the overall tax liability on the business and improves cash flow in the future.
- Credibility and Trust
GST registration helps in increasing the credibility of a business in the eyes of customers, suppliers, and government authorities. Being GST-compliant makes it easier for small businesses to build trust and attract larger customers, as many businesses prefer to deal with GST-registered vendors. Additionally, it facilitates smooth and hassle-free transactions with other GST-registered businesses.
- Wider Market Access
Registered businesses are eligible to participate in government tenders, which often require the suppliers to be GST-registered. It opens doors to more business opportunities, especially for small businesses that want to expand their customer base or enter new markets.
- No TDS/TCS Deduction
If a small business is registered under GST, it does not have to worry about Tax Deduction at Source (TDS) or Tax Collected at Source (TCS), which is often applicable to non-GST-registered businesses in transactions with larger businesses.
- Easier Interstate Transactions
For small businesses engaged in interstate trade, GST registration simplifies the tax structure and eliminates the need for multiple taxes that existed in the pre-GST era. A GST-registered business can freely conduct business across state borders without worrying about compliance with multiple state tax laws.
Challenges of GST Registration for Small Businesses
While there are numerous benefits of registering GST registration, small businesses may face some of the below-listed challenges:
- Compliance Burden: The businesses having GST numbers are required to file regular returns (monthly, quarterly, or annually) depending on the turnover of the business. Small businesses may not have sufficient resources to manage the annual filing. Whole process, paperwork could be a problem but can it e managed with proper consultation and engaging the company expert in compliances.
- Cash Flow Impact: Small businesses may sometimes face the issue of cash flow issue if they are unable to collect GST from customers in a timely manner but are required to remit the tax to the government.
Conclusion
In India, online GST registration is mandatory for small businesses under certain circumstances, primarily based on turnover, the type of business, and whether the business deals with interstate transactions. While businesses below the prescribed turnover limits are not required to register for GST, many choose to do so voluntarily to take advantage of the input tax credit, build credibility, and gain access to a wider business market.
Consulting with a tax professional or legal advisor can help big as well as small businesses to make sure that the business complies with the statutory requirements and avoids any legal issues related to GST. As India continues to embrace the GST regime, businesses that understand the nuances of GST registration and take proactive steps to comply will be better positioned to grow and thrive in an increasingly competitive marketplace.
Whether you are an individual looking to start a small business or looking forward to expanding your business, our expert team is here to help you at every step!
FAQs on GST Registration
- Is GST registration mandatory for businesses with turnover below ₹40 lakhs?
No, businesses with turnover below ₹40 lakhs (₹20 lakhs for special category states) are not required to register for GST unless engaged in interstate supply or e-commerce.
- Can a small business voluntarily register for GST?
Yes, small businesses can voluntarily register for GST, even if their turnover is below the threshold.
- Are businesses selling on e-commerce platforms required to register for GST?
Yes, businesses selling through online marketplaces like Amazon or Flipkart must register for GST, irrespective of their turnover.
- What happens if a business exceeds the turnover threshold for GST registration?
If a business exceeds the prescribed turnover limit, it must apply for GST registration within 30 days to comply with the law.
- Can small businesses under the Composition Scheme claim input tax credit?
No, businesses registered under the Composition Scheme cannot claim input tax credits on their purchases.
- Do export businesses need GST registration?
Export businesses do not need mandatory GST registration, but they can voluntarily register to claim input tax credit on export-related expenses.
- What is the penalty for not registering for GST when required?
Failure to register for GST when required can lead to either a penalty of Rs. 10,000/- or 10% of the tax due from the person/supplier, depending upon whichever is higher.
