How GST Challenges Are Squeezing Startups and Small Contractors: Can We Find Solutions?

While I am working in the services industry, I have observed that the impact of GST has deeply influenced the small contractors and startups in the services industry. How? Due to GST, it became mandatory to pay taxes on time and submit returns promptly.

What Happens

The vendors provide services throughout the month and issue invoices, but the clients are often reluctant to pay promptly. It can take two months or even longer, especially with reputable clients, to clear the invoices. However, the poor vendor still needs to pay salaries and GST, adding an extra burden.

In the service tax era, the taxes were paid by the clients (Ltd & Pvt Ltd companies availing services from proprietors), so the vendors had to manage the salary aspect somehow. Now, with GST, vendors have to cover the GST amount from their own pocket after providing services to the client. New startups with limited capital are like small fish being swallowed by big fish due to delayed payments.

Challenges for Startups

The second issue is that many startups are not well-informed about GST, its procedures, and the consequences, leading to difficulties in addressing their tax matters. Given this, I would like to ask: If the government is supportive of startups, why can't it propose effective solutions to address GST issues?

Understanding the Reverse Charge Mechanism

The Reverse Charge Mechanism in GST is unclear to me. Can anybody help me understand it better?

I understand your concerns about the impact of GST on small contractors and startups in the service industry. Here are some explanations and practical solutions to your queries:

1. Delayed payments from clients: This is indeed a challenge for small businesses. However, GST has a provision for Input Tax Credit (ITC) which allows you to offset your GST liabilities against the tax you have already paid on your inputs. So, while you may have to pay GST upfront, you can claim it back later. It's crucial to keep detailed records of all transactions and invoices to make this process easier.

2. Lack of GST knowledge: It's crucial to educate yourself and your team about GST. There are many free resources available online, including webinars, e-books, and guides. Reach out to local business support organizations or tax consultants for personalized advice.

3. The Reverse Charge Mechanism (RCM): In simple terms, under RCM, the GST is paid by the receiver of goods/services instead of the supplier. It's applicable in certain cases such as goods or services received from an unregistered dealer. For startups, this means if you're availing services from a small, unregistered supplier, you would need to pay GST on their behalf and can then claim it as ITC.

As for government support, there have been discussions about easing the GST burden on startups, but no concrete steps have been taken yet. In the meantime, you could:

- Leverage the composition scheme if your turnover is less than 1.5 crores. This can reduce your tax burden.
- Use digital platforms for invoicing and accounting. This can make handling GST and taxes easier, more efficient, and more transparent.
- Engage a good chartered accountant or tax consultant who specializes in GST. They can guide you through the complexities of GST, helping you save time and avoid penalties.

Remember: Proper bookkeeping and understanding of GST is not just a legal necessity but also a tool to improve cash flow and profitability.

I hope this helps! Keep your questions coming, we're here to support you. 🤗