GST for startups

FINANCIAL INCLUSION

Financial inclusion, a major buzzword being thrown around pretty often nowadays. It seems heavily jargonized and doesn’t seem to hold much say in reality without understanding it it first. Financial Inclusion in general means getting necessary financial services at affordable rates in a reliable and sustainable manner. Sure, having a bank account helps companies use certain financial services like banking and transaction activities, however just having a bank account is not enough to reap the benefits of financial inclusion.

So how does a company make the most of financial inclusion. In a country like India with very strict practices in place and require a lot of checks and balances in place before anything comes to fruition. What if it was easier? What if there was a way that unlocked the entire benefits of financial inclusion?

Well, there is! Three simple alphabets... GST... GST is the one key solution which unlocks the true potential of financial inclusion for small enterprises.

There are some businesses for whom GST registration is compulsory.

• Startups selling goods on aggregators like amazon/ flipkart etc.

• Companies providing services with revenues greater than 20 lakhs

Our services will definitely help these startups, besides these let us show you the benefits for those it is not mandatory.

START-UP WITHOUT GST

Let’s take a start-up which has not registered for GST and compare it with if they do register for GST. In year one they will have none to nominal revenues, however to run their operations they will require some

• purchases like mobile phones, laptops and other electronic devices,

• they will also require a place to work, hence they will also burdensomely cost on rent.

• cloud services

• digital advertising

If they don’t register for GST, they have no chance to recoup any money from what they have spent.

INPUT TAX CREDIT:

So, all our services will help the startups to gain input tax credit. Input tax credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs. If they have registered for GST and have kept copies of all invoices, they are eligible to save up to 18% on these utilities, even if they spend 10000 on GST services, they save about 15% net on all expenses, which helps them not only save money but also grow at a more sustainable pace.

Fig 1: Cost benefit analysis for a business in beginning stage

With no revenues, the company can save around ₹1,80,000 in the first year, this is basically a discount of ₹180,000 on purchases of goods for the next year onwards and can be used to reduce costs till the company starts earning revenue.

This 1,80,000 is the input tax credit that can be availed of if a company has registered for GST. The input tax helps in saving expenses and helps in cutting costs, which can help the company to sustain itself for a longer period of time.

TREND ANALYSIS

Fig 2: Trend analysis of benefits of registered vs unregistered

The shaded region shows the companies which benefit from the registration of GST. Companies with revenues from 0 to 7.5 lakh have a positive impact of GST. The companies in this revenue range have the most to gain from GST registration. These are usually loss-making companies which can save on expenses. After that period, GST becomes a burden on the company, but they can still take advantage of other benefits.

The main inference is that the company has a lot to gain from GST during the beginning phase and growth phase i.e., where there are expenses higher than revenues.

OTHER BENEFITS

Yes, the cost benefits of GST go away once the revenues start flowing in, however the other benefit that a company can avail of is formal loans at a lower interest rate because of GST registration. This is the benefit a company can get if the opt for a formal loan rather than getting it from informal sources like loan sharks.

Annual Interest rate	18%
Loan Term (in years)	10
Payments per year	12
Loan Amount	₹20,00,000
Inflation	6%

Effective cost: ₹11,82,829.00 (formal)

Effective cost: ₹21,21,648.00 (informal)

Table 1: Effective cost of formal vs informal loans

Getting a loan is a cost, you pay interest on the principal amount, which means you pay for the availability of money. The effective cost is the amount of money a company pays extra in terms of today’s money. By using the discounted cashflow method and finding out the NPV (Net Present Value) of the cashflows going out we have calculated the effective cost of purchasing the loan.

It can be seen that even at same interest rates the effective cost of formal loans is half of that of informal loans. The effect of this can be even larger at longer periods and higher interest rates.

Besides that, companies with a GST number can avail of an overdraft facility from banks.

So, we can clearly conclude that GST is very much beneficial for a early age start-up. Every start-up should get GST number and should enjoy the benefits that comes with it.