Businesses that get started after July 1, 2017 will be mandatorily registering under GST. However, businesses that exist prior to the date of GST rollout will need to transition to GST. A business transitioning to GST should know about and consider the following
- Input tax credit
- Excise duty, and
- Composition scheme
Input tax credit
Input Tax Credit or ITC is the tax that a business pays on a purchase and that it can use to reduce its tax liability when it makes a sale. In other words, businesses can reduce their tax liability by claiming credit to the extent of GST paid on purchases.
A business having input tax credit under the earlier tax system, can transfer its credit as ITC under GST, subject to some conditions. The business needs to create a list of its entire stock as of June 30, 2017 and claim input tax credit for the same while filing returns. If such goods are eligible for input tax credit under the new GST law, then the business can claim ITC under GST. To claim ITC under GST, the business needs to log into the GST portal and fill one of the electronic forms TRAN-1 or TRAN-2 as applicable.
A manufacturing business is charged excise duty at the point of manufacture of goods under the earlier tax regime. GST is a destination based tax system – a good is taxed at the place of supply. A manufacturing business doesn’t get input tax credit against excise duty. This means that a manufacturing business will have been taxed at the point of manufacturing prior to June 30, 2017 and will be taxed again at the point of supply on or after July 1, 2017. This means that profit margins of such goods will be lower during the transition period, unless the business decides to revise upwards its price post GST to account for the “double taxation”.
Many businesses in the past have operated without creating invoices or following proper accounting methods. These businesses can choose to operate under GST under Composition scheme, and stay compliant. Under this scheme, a business can pay a percentage of its annual turnover as GST, without paying tax for each and every transaction. However, this option is available only for businesses with annual turnover below Rs. 75 lakh.
The GST under the Composition scheme will be not more than 1.5% of the turnover for manufacturing businesses, not more than 2.5% for restaurants and not more than 0.5% for other suppliers.