GST is set to revolutionize the world of Indian indirect taxation and Input Tax Credit is one of its key features which will help in eliminating cascading effect of taxes. GST is ca comprehensive tax levy on manufacturing, sale and consumption of goods and services at a national level. 

In simple words, Input Credit means at the time of paying tax on sales, you can reduce the tax you have already paid on purchases. 

When you buy a products/services from a registered dealer you pay tax on the purchase. On Selling you Collect the Tax. You adjust the taxes paid at the time of purchase with the amount of output Tax (Tax on Sales) & balance Liability of Tax (Tax on sales minus tax on purchase) has to be paid to the government. This mechanism is called Utilization of Input Tax Credit. 

For Example: ABC is a Manufacturing Company having: 

1. Tax payable on Output (Final Product) is Rs. 1000/- 
2. Tax Paid on input (purchases) is Rs. 500/- 
3. ABC Company can claim Input Credit & need to deposit Rs. 500/-in taxes. 

Key Terminologies of GST Law in connection with Input Tax Credit under GST are as follows: 

What is Input? 

Input means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business. 

What is Input Service? 

This term denotes any service used or intended to be used by a supplier in the course of furtherance of business. 

What is Input Tax? 

Input tax in relation to a registered person, means the Central Tax, State Tax, Integrated Tax or Union territory tax charged on any supply of goods or services or both made to him & includes – 

1. the integrated goods and services tax charged on import of goods ; 
2. the tax payable under the provisions of sub sections (3) and (4) of section 9; 
3. the tax payable under the provisions of sub sections (3) and (4) of section 5 of the integrated goods and services tax; 

d) the tax payable under the provisions of sub sections (3) and (4) of section 9of the respective State goods and services Tax Act ;or 

e) the tax payable under the provisions of sub sections (3) and (4) of section 7of the Union Territory goods and services Tax Act, 

but does not include the tax paid under the composition levy. 

What is 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 and pay the balance amount.

Here’s how:
When you buy a product/service from a registered dealer you pay taxes on the purchase. On selling, you collect the tax. You adjust the taxes paid at the time of purchase with the amount of output tax (tax on sales) and balance liability of tax (tax on sales minus tax on purchase) has to be paid to the government. This mechanism is called utilization of input tax credit.

For example- you are a manufacturer: 

1. Tax payable on output (final product) is Rs 450
2. Tax paid on input (purchases) is Rs 300
3. You can claim input credit of Rs 300 and deposit only Rs 150 in taxes 

Payment of Tax under GST

Once the tax liability is determined, the taxpayer must make the payment of GST by the 20th of the following month. Payments can be made through:

1. Electronic Credit Ledger

This ledger will serve as an electronic wallet. Where the Taxpayer needs to make any payment such as tax, interest, penalty etc and he does not have enough credit in his E-Credit Ledger, he will have to simply add money to the wallet and the money will be utilized to make the payment. 

This Ledger will basically reflect all the deposits made in cash using various modes. 

2. Electronic Cash Ledger

The input tax credit that is self assessed in the monthly returns will be reflected here under three categories i.e. IGST, CGST & SGST. The Tax Payer will be able to utilize the balance shown in this account only for payment of Tax as per the credit utilization rules and no other amount such as Interest, Penalty etc. 

a. Tax Payment for Different GST Components:

• CGST: Paid to the Central Government.
• SGST/UTGST: Paid to the respective State Government or Union Territory.
• IGST: Paid to the Central Government, with an apportionment to the State Government based on the place of supply.

Interest and Penalties

a. Interest on Late Payment:

• Delayed Payment of Tax: If GST is not paid within the prescribed time, interest is charged at the rate of 18% per annum.
• Excess ITC Claimed: If ITC is wrongly claimed and utilised, the interest rate is 24% per annum.

Interest is calculated from the due date of the payment to the actual date of payment.

b. Penalties:

Various penalties are imposed under GST law for non-compliance, which include:

1. Failure to Pay Tax: A general penalty of ₹10,000 or 10% of the tax due, whichever is higher, is imposed.
2. Non-filing of Returns: Penalty for non-filing of returns is ₹100 per day, subject to a maximum of ₹5,000.
3. Fraudulent Activities: If any fraud, misstatement, or suppression of facts is found, a penalty of 100% of the tax due may be levied, along with imprisonment in severe cases.
4. Failure to Issue Invoice: A penalty of ₹10,000 can be imposed for failure to issue invoices as per GST law.

Pre-Requisites to claim Input Tax Credit (ITC) 

The following conditions have to be met to be entitled to Input Tax Credit under the GST scheme: 

1. One must be a registered taxable person. 

2. One can claim Input Tax Credit only if the goods and services received is used for business purposes. 

3. Input Tax Credit can be claimed on exports/zero rated supplies and are taxable. 

4. For a registered taxable person, if the constitution changes due to merger, sale or transfer of business, then the Input Tax Credit which is unused shall be transferred to the merged, sold or transferred business. 

5. One can credit the Input Tax Credit in his Electronic Credit Ledger in a provisional manner on the common portal as prescribed in model GST law. 

6. Supporting documents – debit note, tax invoice, supplementary invoice, are needed to claim the Input Tax Credit. 

7. If there is an actual receipt of goods and services, an Input Tax Credit can be claimed. 

8. The Input Tax should be paid through Electronic Credit/Cash ledger. 

9. Person claiming the ITC has to furnish the returns. 

10. Full Credit on capital goods will be allowed in the year of purchase itself. 

Input Tax Credit Process 

Who can claim ITC?

ITC can be claimed by a person registered under GST only if he fulfils ALL the conditions as prescribed.

1. The dealer should be in possession of tax invoice
2. The said goods/services have been received
3. Returns have been filed.
4. The tax charged has been paid to the government by the supplier.
5. When goods are received in installments ITC can be claimed only when the last lot is received.
6. No ITC will be allowed if depreciation has been claimed on tax component of a capital good

A person registered under composition scheme in GST cannot claim ITC.

What can be claimed as ITC?

ITC can be claimed only for business purposes. ITC will not be available for goods or services exclusively used for: 

1. Personal use
2. Exempt supplies
3. Supplies for which ITC is specifically not available

How to claim ITC?

All regular taxpayers must report the amount of input tax credit (ITC) in their monthly GST returns of Form GSTR-3B. The table 4 requires the summary figure of eligible ITC, ineligible ITC and ITC reversed during the tax period.

The format of the Table 4 is given below:

A taxpayer could have claimed any amount of provisional ITC until 9 October 2019. Later on, the government restricted the provisional ITC as below:

Accordingly, a taxpayer can claim ITC only if the same appears appears in their GSTR-2B. Hence, no provisional ITC can be claimed from 1st January 2022 onwards. Hence, matching of the purchase register with the GSTR-2B is crucial for ITC claims.

ITC Availment Timeline:

The time limit to claim input tax credit under GST can only be claimed before the due date of filing the GST return for September of the next financial year or the date of filing the annual return, whichever is earlier.

For example: If a registered person wants to claim an input tax credit for the financial year 2024-25. They must do so before filing the monthly return for September 2025 or filing the annual return for 2024-25, whichever is earlier. 

Input Tax Works Under GST 

Suppose Mr. A is a seller. He sells goods to Mr. B. The buyer Mr. B is now eligible to claim the purchase credit using his purchase invoices. 

This is how it works: 

1. A uploads all his tax invoices details as issued in GSTR-1. 
2. The details uploaded by Mr. A is automatically populated or reflected in GSTR-2A. This same data will get reflected when Mr. B files the GSTR-2 returns which are nothing but the details of his purchase. 
3. The details of the sale are then accepted and acknowledged for by Mr. B, and subsequently, the purchase tax is credited to Mr. B’s ‘Electronic Credit Ledger ‘ He can use this to adjust it later for future output tax liability and receive a refund.

Documents and forms required to claim Input Tax 

Credit Each applicant will require the following documents to claim Input Tax Credit under GST: 

1. Supplier’s Invoice:
   This is the invoice issued by a supplier for purchasing goods or services you made.
   
2. Bill of Supply:
   This document is issued in case of supplies that are exempt from GST. A supplier issued a bill of supply for goods and services or both as per the GST invoice rules.

1. Supplier’s Debit Note:
   The supplier of goods or services issues a supplier’s debit note. It is used to update the details or correct any errors. A debit note issued by the supplier to the recipient in case of tax payable or taxable value as specified in the invoice is less than the tax payable or taxable value on such supplies.
   
2. ISD Document:
   If the registered person has opted for  Input Service Distributor scheme, the credit notes and invoices provided by the ISD can be used to avail the ITC..
   
3. Bill of Entry:
   A Bill of Entry or similar document can be used for imported goods.

1. A credit note or invoice

It is to be issued by the ISD (Input Service Distributor) according to the GST invoice rules. 

1. An invoice issued like the bill of supply under certain situations instead of the tax invoice. If the amount is lesser than INR 200 or in conditions where the reverse charges are applicable according to the GST law. 

The above documents prepared as per the GST invoice rules should be furnished while filing the GSTR-2 form. Failure to present these forms can lead to either rejection or resubmission of the request. 

Input Tax Credit Utilisation

The utilisation of ITC follows a hierarchy to pay GST liabilities, ensuring that credit from different types of GST (CGST, SGST, IGST) is used in a specified manner. The sequence of utilisation is as follows:

1. Utilisation of IGST Credit:

• • First, IGST credit is used to pay off IGST liability.
  • Remaining IGST credit can be used for paying CGST and SGST/UTGST.

1. Utilisation of CGST Credit:

• • CGST credit is used to pay CGST liability first.
  • If there is any balance, it can be used for paying IGST liability.
  • CGST cannot be used to pay SGST/UTGST liability.

1. Utilisation of SGST/UTGST Credit:

• • SGST/UTGST credit is used to pay SGST/UTGST liability first.
  • If there is any balance, it can be used to pay IGST liability.
  • SGST/UTGST cannot be used to pay CGST liability.

Example: Suppose a taxpayer has the following liabilities and ITC balances:

• IGST liability: ₹10,000
• CGST liability: ₹5,000
• SGST liability: ₹5,000

Available ITC:

• IGST credit: ₹15,000
• CGST credit: ₹2,000
• SGST credit: ₹3,000

In this case:

• The ₹10,000 IGST liability will first be adjusted against IGST credit.
• The remaining ₹5,000 of IGST credit can then be used to pay the ₹5,000 CGST liability.
• No balance IGST credit remains to be utilised for SGST liability, so SGST credit will be used to pay SGST liability.

Input tax credit in respect of IGST, CGST, Cess and SGST/UTGST can be utilized in following sequences:

Credit of CGST cannot be setoff with credit of SGST and vice versa. Credit of one state of SGST cannot be set off with SGST of another state. ITC of cess will be utilized for cess only. 

Claiming Input Tax Credit Against Inputs Sent for Job Work 

As a registered taxable person you can also claim ITC on inputs sent to gob-workers if the following conditions are satisfied: 

1. You should receive such input back within 1 year. 
2. If the inputs involved are capital goods, then you should get such inputs back within 3 years. 
3. If you fail to receive inputs within the above mentioned time period, then you will have to pay an amount equal to ITC claimed along with interest. 
4. However, you are still allowed to reclaim ITC if inputs or capital goods are received back from the place of business. 

Input Tax Credit on Supply of Capital Goods 

1. A registered taxable person is liable to pay tax on such a supply of capital goods on which ITC has already been claimed. 
2. This amount should be equal to ITC claimed after reducing it by prescribed percentage points or the tax applicable on the transaction value of such capital goods, whichever is higher. 

ITC Provided by Input Service Distributor (ISD) 

An input service distributor (ISD) can be the head office (mostly) or a branch office or registered office of the registered person under GST. ISD collects the input tax credit on all the purchases made and distribute it to all the recipients (branches) under different heads like CGST, SGST/UTGST, IGST or cess. 

ITC on Transfer of Business

This applies in cases of amalgamations/mergers/transfer of business. The transferor will have available ITC which will be passed to the transferee at the time of transfer of business.

Negative List for Input Tax Credit

ITC is Not Available to be Claimed in the Following Cases, u/s17 (5): 

Certain goods and services are not eligible for ITC, and these are referred to as the negative list. The key items in the negative list for ITC are:

1. Motor Vehicles and Conveyances: ITC is not allowed on motor vehicles unless they are used for transportation of goods, passengers, or for training purposes.
2. Food and Beverages: ITC is not allowed for food, beverages, and catering services unless the taxpayer is engaged in providing the same line of services.
3. Membership of Clubs, Health, and Fitness Centres: ITC is not available for expenses incurred on club memberships or fitness-related services.
4. Works Contracts: ITC is not available on works contracts for construction of immovable property unless it is used for further supply of works contracts.
5. Goods Used for Personal Consumption: Any goods or services that are used for personal consumption are excluded from ITC.
6. Construction Services: ITC is not available on goods or services used for the construction of immovable property (other than plant or machinery).
7. Telecommunication Towers and Pipelines: ITC on goods or services for the construction of telecommunication towers and pipelines is also not available.
8. Works Contract Services when supplied for construction of an immovable property,( other than plant & machinery) is not eligible ,except where it is an input service for further supply of works contract service 
9. If depreciation has been claimed on the cost of capital goods, then they are not eligible for Input Tax credit. 
10. Goods or services or both received by a non-resident taxable person are not eligible for input tax credit, except on goods imported by him; 
11. Goods or services or both used for personal consumption are not eligible for ITC; 
12. Goods Lost, stolen, destroyed, written off or disposed off by way of gift or free samples are not eligible for ITC; 

Special circumstances under which ITC is available: 

1. A person who has applied for registration within 30 days of becoming liable for registration is entitled to ITC of input tax in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) on the day immediately preceding the date from which he becomes liable to pay tax.
2. A person who has taken voluntary registration under section 23(3) of the WBGST Act, 2017 is entitled to ITC of input tax in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) on the day, immediately preceding the date of registration.
3. A person switching over to normal scheme from composition scheme under section 10 is entitled to ITC in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) and capital goods on the day immediately preceding the date from which he becomes liable to pay tax as normal taxpayer. 
4. Where an exempt supply of goods or services or both become taxable, the person making such supplies shall be entitled to take ITC in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) relatable to exempt supplies. He shall also be entitled to take credit on capital goods used exclusively for such exempt supply, subject to reductions for the earlier usage as prescribed in the rules.
5. ITC, in all the above cases, is to be availed within 1 year from the date of issue of invoice by the supplier. f. In case of change of constitution of a registered person on account of sale, merger, demerger etc., the unutilised ITC shall be allowed to be transferred to the transferee. 
6. A person switching over from composition scheme under section 10 to normal scheme or where a taxable supply become exempt, the ITC availed in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) as well as capital goods will have to be paid (ITC reversal). 
7. In case of supply of capital goods or plant and machinery, on which ITC is taken, an amount equivalent to ITC availed minus the reduction as prescribed in rules (5% for every quarter or part thereof) shall have to be paid. In case the tax on transaction value of the supply is more, the same would have to be paid.

Input Tax Credit Reversal

Under certain circumstances, ITC that has already been claimed needs to be reversed. This can occur in the following situations:

1. Non-payment to Supplier within 180 Days:

If the taxpayer fails to pay the supplier within 180 days of receiving the goods or services, the ITC claimed must be reversed.

1. Change in Use of Goods or Services:

If goods or services that were originally intended for taxable supplies are used for exempt supplies or personal purposes, the ITC claimed earlier has to be reversed proportionately.

1. Capital Goods Sold Before Five Years:

When capital goods on which ITC was claimed are sold before five years, the ITC must be reversed based on the residual life of the asset.

1. Goods Lost, Stolen, or Destroyed:

ITC must be reversed if goods are lost, stolen, destroyed, written off, or disposed of as gifts or free samples.

1. Input Service Distributor (ISD) Incorrect Distribution:

If the ITC is incorrectly distributed by an ISD, it needs to be reversed.

Matching Mechanism for ITC Monitoring 

1. A matching mechanism has been developed to make sure there is no duplication in claiming ITC. 
2. It ensures that inward supplies returns filed by receiver matches outward supplies returns filed by supplier. 
3. Matching mechanism also helps in matching ITC claims with customs paid where goods are imported by registered taxable person. 
4. Any discrepancy which arises post verification is intimated to both parties so that they can make necessary corrections within the prescribed time frame. 

Although, ITC is a key to eliminate cascading effect of taxes. However, there are several conditions & restrictions to avail the credit for which there is a need to comply with the various documents and the other criteria required.

1.1 Introduction to Marketing Management
Marketing management is the process of developing strategies and planning for product, pricing, promotion, and distribution to generate value for customers and achieve organizational goals. For Micro, Small, and Medium Enterprises (MSMEs), marketing management is essential to compete effectively in both local and global markets.

1.2 Role of Marketing in MSMEs

• Customer Orientation: MSMEs focus on identifying and fulfilling customer needs. In competitive markets, customer-centric approaches increase brand loyalty and retention.
• Resource Optimization: With limited financial and human resources, MSMEs must carefully plan their marketing strategies to ensure maximum output from minimum investment.
• Growth and Expansion: Effective marketing strategies help MSMEs expand their market share, reach new customer bases, and increase profitability.

1.3 Key Functions of Marketing Management

• Product Development: Innovating and improving products to meet customer demand.
• Pricing Strategy: Setting prices that attract customers while ensuring profitability.
• Distribution: Choosing the right channels to ensure product availability to target customers.
• Promotion: Raising awareness about the products through advertisements, sales promotions, and digital marketing.

1.4 Importance of Marketing for MSMEs

• Brand Building: Marketing helps in building brand identity, positioning, and reputation in a competitive marketplace.
• Customer Retention: Engaging customers with consistent communication and value propositions ensures loyalty.
• Adaptability: In a constantly changing market, marketing management enables MSMEs to adapt to new trends and consumer behaviors.

2: Market Segmentation in MSMEs

2.1 Concept of Market Segmentation
Market segmentation is the process of dividing the overall market into distinct groups of buyers with different needs, characteristics, or behaviors. It helps MSMEs allocate their resources more efficiently by targeting specific segments.

2.2 Importance of Market Segmentation for MSMEs

• Focused Marketing Efforts: By targeting specific groups, MSMEs can optimize their marketing spend and avoid wastage on audiences unlikely to convert.
• Tailored Product Offerings: MSMEs can develop products that meet the specific needs of each market segment, enhancing customer satisfaction.
• Competitive Advantage: Understanding and catering to niche segments can help MSMEs differentiate themselves from larger competitors.

2.3 Types of Market Segmentation

• Demographic Segmentation: Based on factors such as age, gender, income, and occupation. For example, an MSME might target middle-income working women for a specific product.
• Geographic Segmentation: Segmenting customers by location, such as urban, rural, regional, or international markets.
• Psychographic Segmentation: Divides the market based on lifestyle, values, and personality traits. For instance, health-conscious consumers might prefer organic products.
• Behavioral Segmentation: Focuses on consumer knowledge, attitudes, or responses to a product. For example, heavy users of a product might be offered loyalty programs.

2.4 Steps in Market Segmentation

1. Identifying Segmentation Criteria: Determine which factors are most relevant to divide the market.
2. Segmenting the Market: Break the overall market into different segments based on identified criteria.
3. Targeting: Select one or more segments to focus marketing efforts on.
4. Positioning: Create a unique positioning strategy that appeals to the chosen target segment.

3: Marketing Mix in MSMEs (7 Ps of Marketing)

The traditional marketing mix, known as the 4 Ps (Product, Price, Place, and Promotion), has been expanded to include three additional Ps (People, Process, and Physical Evidence), especially relevant in service-oriented industries. These 7 Ps of Marketing provide a more comprehensive approach to creating an effective marketing strategy, especially for MSMEs, which need to address various aspects of both product and service marketing.

3.1 The 7 Ps of Marketing

3.1.1 Product

Definition:
Product refers to the goods or services offered by an MSME to its customers. It includes everything from the product design, features, quality, packaging, and brand image.

Key Considerations for MSMEs:

• Innovation and Development: MSMEs must continually innovate to meet evolving customer needs. Whether offering a physical product or a service, continuous improvement and adaptation are crucial.
• Product Differentiation: In a competitive market, MSMEs need to distinguish their offerings from those of competitors. This can be done by adding unique features or providing exceptional quality.
• Product Life Cycle: MSMEs should monitor their product’s life cycle (Introduction, Growth, Maturity, and Decline) and adjust marketing strategies accordingly.

Example: An MSME producing eco-friendly clothing may focus on promoting the sustainability aspect of its product, making it stand out in the market.

3.1.2 Price

Definition:
Price refers to the amount a customer pays for a product or service. Pricing is a crucial aspect of the marketing mix, as it directly impacts profitability and customer perceptions of value.

Key Considerations for MSMEs:

• Cost-Plus Pricing: Many MSMEs use cost-plus pricing, where the price is determined by adding a markup to the cost of production.
• Competitive Pricing: MSMEs must consider competitor prices and customer willingness to pay when setting their own prices.
• Pricing Flexibility: Offering discounts, promotional pricing, or bundled offers can help attract price-sensitive customers.
• Perceived Value: MSMEs must ensure that the price reflects the perceived value of the product in the eyes of the customer.

Example: A small bakery offering premium, artisanal pastries may set higher prices compared to mass-produced goods, as customers perceive greater value in handcrafted items.

3.1.3 Place (Distribution)

Definition:
Place refers to the distribution channels through which a product or service is made available to customers. For MSMEs, this can involve both physical and digital channels.

Key Considerations for MSMEs:

• Distribution Network: MSMEs need to identify the most efficient and cost-effective ways to distribute their products, whether through direct selling, wholesalers, retailers, or online platforms.
• E-commerce and Digital Channels: Many MSMEs benefit from using e-commerce platforms to reach a broader audience, especially with the rise of online shopping.
• Logistics Management: Timely and reliable distribution is essential to maintain customer satisfaction. MSMEs should partner with trustworthy logistics providers.

Example: A local handicraft MSME may use both physical stores and online marketplaces like Amazon or Etsy to sell its products, ensuring a wider customer base.

3.1.4 Promotion

Definition:
Promotion encompasses all the marketing communications that inform, persuade, and remind potential customers about a product or service. It includes advertising, sales promotions, public relations, and direct marketing.

Key Considerations for MSMEs:

• Cost-Effective Advertising: MSMEs often have limited budgets, so they should use affordable marketing channels such as social media, local newspapers, and word-of-mouth.
• Sales Promotion: Discounts, coupons, contests, and special offers can drive short-term sales and attract new customers.
• Public Relations: Building positive relationships with the community and stakeholders can enhance the MSME’s brand image.
• Digital Marketing: Social media platforms (e.g., Facebook, Instagram) and search engine marketing (Google Ads) provide effective ways for MSMEs to reach targeted audiences with limited investment.

Example: A food delivery MSME might offer special discounts for first-time customers, promoted via social media ads, to encourage trial orders.

3.1.5 People

Definition:
People refer to everyone involved in the delivery of a product or service, including employees, management, and even customers. In service industries, “people” are a critical element because they directly affect customer satisfaction and the perception of the business.

Key Considerations for MSMEs:

• Customer Service: Providing excellent customer service is crucial for building long-term relationships and ensuring repeat business. For MSMEs, every interaction matters, and having a well-trained, courteous staff is essential.
• Employee Engagement: Employees who are motivated and well-trained can provide better customer experiences. MSMEs should invest in their staff through training and development.
• Customer Involvement: Encouraging customer feedback and engagement helps MSMEs improve their offerings and meet customer expectations.

Example: In a small café, friendly and attentive staff can create a welcoming atmosphere, enhancing the overall customer experience and building brand loyalty.

3.1.6 Process

Definition:
Process refers to the procedures, mechanisms, and flow of activities through which a product or service is delivered to the customer. This includes everything from the manufacturing process to customer service protocols.

Key Considerations for MSMEs:

• Efficiency: MSMEs need to streamline processes to reduce costs and increase productivity. Efficient processes ensure timely delivery and maintain customer satisfaction.
• Service Delivery: For service-based MSMEs, the process of delivering the service (e.g., how quickly a repair service is performed or how smoothly an online order is fulfilled) can significantly impact customer satisfaction.
• Automation and Technology: MSMEs can leverage technology to automate routine tasks, improving the speed and accuracy of their operations.

Example: An online retail MSME might automate its order processing system to ensure quick delivery, minimizing the chance of errors and enhancing the customer experience.

3.1.7 Physical Evidence

Definition:
Physical evidence refers to the tangible elements that a customer can see, touch, or feel, which support or enhance the perception of the service. This is particularly relevant for service-oriented businesses, where intangibility makes it harder to evaluate quality before purchase.

Key Considerations for MSMEs:

• Ambience and Environment: The physical appearance of an MSME’s business location (such as a store or office) influences customer perceptions of quality and professionalism. Clean, well-maintained environments create a positive impression.
• Branding and Design: Elements such as packaging, signage, uniforms, and logos all contribute to the customer’s overall experience and can communicate the brand’s identity.
• Customer Interaction Touchpoints: The appearance of websites, online interfaces, and product packaging forms part of the physical evidence that shapes customer expectations.

Example: An MSME offering web development services can enhance its credibility by having a professional-looking website and branded marketing materials, reinforcing trust in its digital expertise.

4: Rural Marketing in MSMEs

4.1 Introduction to Rural Marketing
Rural marketing refers to the activities undertaken by MSMEs to promote their products in rural areas, which form a significant portion of India’s population and market.

4.2 Characteristics of Rural Markets

• Diverse Demographics: Rural markets are highly diverse in terms of culture, language, and buying behavior.
• Lower Purchasing Power: Rural consumers often have lower disposable incomes, so products must be affordable and offer clear value.
• Traditional Media: Word-of-mouth, local festivals, and folk events play a larger role in rural marketing.

4.3 Challenges in Rural Marketing

• Infrastructure Issues: Poor roads, lack of transportation, and unreliable electricity make distribution challenging.
• Cultural Differences: MSMEs need to tailor their marketing strategies to accommodate local cultural norms and values.

4.4 Strategies for Effective Rural Marketing

• Affordable Products: MSMEs should design low-cost products and provide smaller, affordable packaging to meet rural needs.
• Localized Marketing: Use local languages and cultural references in promotional campaigns.
• Improved Distribution Networks: Partner with local distributors and retailers to ensure product availability in remote areas.

5: Service Marketing in MSMEs

5.1 Definition and Importance of Service Marketing
Service marketing is the process of promoting and selling intangible products or services. For MSMEs offering services such as consulting, repairs, or online solutions, service marketing is essential to build customer relationships and trust.

5.2 Characteristics of Services

• Intangibility: Services cannot be seen, touched, or stored, making it harder to convey their value to customers.
• Inseparability: Services are produced and consumed simultaneously (e.g., a haircut or a hotel stay).
• Perishability: Services cannot be stored for future use, creating challenges in managing supply and demand.
• Variability: The quality of services can vary depending on who provides them, when, and where.

5.3 Marketing Strategies for Services

• Building Trust: Since services are intangible, trust is key. MSMEs can build trust through positive reviews, testimonials, and high-quality customer service.
• Customer Experience: Providing excellent customer service can differentiate an MSME from competitors.
• Personalization: Offering customized services can increase customer satisfaction and loyalty.

6: Digital Marketing in MSMEs

6.1 Introduction to Digital Marketing
Digital marketing refers to the use of digital channels such as websites, social media, and search engines to promote products or services. For MSMEs, digital marketing provides a cost-effective way to reach a wide audience and compete with larger businesses.

6.2 Importance of Digital Marketing for MSMEs

• Cost Efficiency: Digital marketing requires a lower investment compared to traditional media, making it ideal for MSMEs with limited budgets.
• Targeted Reach: Digital tools allow MSMEs to target specific customer segments based on demographics, behaviors, and interests.
• Measurable Results: Unlike traditional marketing, digital marketing provides detailed analytics, allowing MSMEs to measure the effectiveness of campaigns in real-time.

6.3 Key Digital Marketing Strategies

• Search Engine Optimization (SEO): Ensuring the MSME’s website ranks high in search results to drive organic traffic.
• Social Media Marketing: Platforms like Facebook, Instagram, and LinkedIn provide opportunities for MSMEs to engage with customers and promote products.
• Email Marketing: Sending targeted emails to promote products, services, or offers to potential and existing customers.
• Content Marketing: Creating valuable and informative content (e.g., blogs, videos, infographics) to attract and retain customers.

6.4 Challenges in Digital Marketing

• Keeping Up with Trends: The digital landscape changes rapidly, requiring constant learning and adaptation.
• Limited Expertise: Many MSMEs lack the in-house expertise to fully leverage digital marketing tools.

]]> https://www.mamatarathi.com/2024/09/28/marketing-management-in-msmes/feed/ 0 https://www.mamatarathi.com/2024/09/14/supply-under-gst-levy-and-collection/ https://www.mamatarathi.com/2024/09/14/supply-under-gst-levy-and-collection/#respond Sat, 14 Sep 2024 04:56:00 +0000  10. Levy and Collection 

1. Levy and collection as per CGST Act, 2017 

1. U/s 9(1) of CGST Act, 2017 there shall be levied a tax – 

• Called the Central Goods and Services Tax(CGST); 
• On all the intra-state supplies of goods or services or both, except on supply of alcoholic liquor for human consumption; 
• On the value determined u/s 15; and 
• At such a rate (maximum 20%,) as notified by the Central Government on recommendation of GST Council; and 
• Collected in such a manner as may be prescribed; and 
• Shall be paid by the taxable person.

(b) U/s 9(2) of CGST Act 2017, the CGST of following supply shall be levied with the effect from such date as notified by the Central Government on recommendation of GST Council

• Petroleum crude 
• High speed diesel 
• Motor spirit (commonly known as petrol) 
• Natural gas 
• Aviation turbine fuel

(c) U/s 9(3), CGST is to be paid on reverse charge basis by the recipient on notified goods/ services or both (liability to pay tax by the recipient of supply of goods / services rather than supplier of goods/ services under forward charge) 

(d) U/s 9(4), CGST on taxable supply of goods/ services to registered supplier from unregistered supplier is to be paid on reverse charge basis by the recipient. 

(e) U/s 9(5), E-Commerce operator is liable to pay CGST on notified intra-state supplies.

2. Levy and collection as per IGST Act, 2017 

(a) U/s 5(1) of IGST Act, 2017 there shall be levied a tax – 

• Called the Integrated Goods and Services Tax (IGST); 
• On all the inter-state supplies of goods or services or both, except on supply of alcoholic liquor for human consumption; 
• On the value determined u/s 15 of CGST Act, 2017; and 
• At such a rate (maximum 40%,) as notified by the Central Government on recommendation of GST Council; and 
• Collected in such a manner as may be prescribed; and 
• Shall be paid by the taxable person. 

Provided further that IGST will be imposed on goods/ services imported into India.

(b) U/s 5(2) of IGST Act, 2017, the CGST of following supply shall be levied with the effect from such date as notified by the Central Government on recommendation of GST Council 

• Petroleum crude 
• High speed diesel 
• Motor spirit (commonly known as petrol) 
• Natural gas 
• Aviation turbine fuel

(c) U/s 5(3), IGST is to be paid on reverse charge basis by the recipient on notified goods/ services or both (liability to pay tax by the recipient of supply of goods / services rather than supplier of goods/ services under forward charge). 

(d) U/s 5(4), IGST on taxable inter-state supply of goods/ services to registered supplier from unregistered supplier (agriculturist) is to be paid on reverse charge basis by the recipient. 

(e) U/s 5(5), E-Commerce operator is liable to pay CGST on notified inter-state supplies.

3. Levy and Collection of GST Under UTGST Act. (Section 7)

The provisions  under section 7 of  the UTGST Act  are similar to  section 9 of CGST  Act except— 

1. the word  CGST has been  substituted by  the word  UTGST under  the UTGST  Act. 
2. under UTGST  Act, tax called  UT tax is be  levied on all  intra-State  supplies, 
3. maximum rate 7(1) of UTGST  Act is 20%.

Taxability of ECO for specified services

11. Goods and Service Tax (GST) Payable on Reverse Charge Basis [Section 9(3) of CGST Act, section 5(3) of IGST Act and  section 7(3) of the UTGST Act]

The Government may, on the recommendations of the Council, by notification, specify categories of supply  of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods  or services or both. 

Further, all the provisions of the relevant Act shall apply to such recipient as if he is the person liable for  paying the tax in relation to the supply of such goods or services or both. 

1. Reverse Charge in respect of Supply of Goods under GST :

In respect of supply of the following goods,  the tax on such goods shall be paid on reverse charge basis by the recipient of such goods 

Categories of supply of goods mentioned in column (2) of the Table below, supplied by a person as  specified in column (3) of the said Table, the whole of central tax leviable under section 9 of the said  Central Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such  goods as specified in column (4) of the said Table:—

2. Reverse Charge in respect of Supply of Services under GST: 

In respect of supply of the following services the tax on such supply shall be paid on reverse charge basis by  the recipient of such services 

Categories of supply of services mentioned in column (2) of the Table below, supplied by a person as  specified in column (3) of the said Table, the whole of central tax leviable under section 9 of the said  Central Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such  services as specified in column (4) of the said Table:—  Table

1. The person who pays or is liable to pay freight for the transportation of goods by road in goods carriage, located in the taxable territory shall be treated as the person who receives the service for the purpose of this notification.
2. the business entity located in the taxable territory who is litigant, applicant or petitioner, as the case may be, shall be treated as the person who receives the legal services for the purpose of this notification.

]]> https://www.mamatarathi.com/2024/09/14/supply-under-gst-levy-and-collection/feed/ 0 https://www.mamatarathi.com/2024/09/14/supply-under-gst-time-place-and-value-of-supply/ https://www.mamatarathi.com/2024/09/14/supply-under-gst-time-place-and-value-of-supply/#respond Sat, 14 Sep 2024 04:51:00 +0000  Supply under GST

1. Meaning of Supply

Supply includes sale, transfer, exchange, barter, license, rental, lease and disposal. If a person undertakes either of these transactions during the course or furtherance of business for consideration, it will be covered under the meaning of Supply under GST. 

2. Definition of Supply

As per Section 7 of the CGST Act, 2017, the term ‘supply’ includes:

• All forms of supply of goods or services such as sale, transfer, barter, exchange, license, rental, lease, or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
• Import of services for a consideration whether or not in the course or furtherance of business.
• Activities specified in Schedule I, made or agreed to be made without a consideration.
• Activities to be treated as supply of goods or supply of services as referred to in Schedule II.

3. Scope of Supply

The scope of supply under GST encompasses:

• Goods and Services: All kinds of movable properties and intangible properties are included.
• Consideration: Must be for consideration except in specified cases.
• Business: Must be in the course or furtherance of business.
• Schedules: Certain activities specified in Schedules I and II to be treated as supply even if made without consideration.

4. Elements of Supply

Supply has two important elements: 

• Supply is done for a consideration

Supply for Consideration Consideration has specifically been defined in the CGST Act, 2017. It can be in money or in kind. Any subsidy given by the Central Government or a State Government is not considered as consideration. It is immaterial whether the payment is made by the recipient or by any other person. 

A deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.

Further, when there is barter of goods of services, the same activity constitutes supply as well as a consideration. When a barber cuts hair in exchange for a painting, hair cut is a supply of services by the barber. It is a consideration for the painting received. 

However, there are exceptions to the requirement of ‘Consideration’ as a pre-condition for a supply to be called a supply as per GST. As per schedule to CGST Act, 2017, activities as mentioned below shall be treated as supply even if made without consideration: 

1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets. 
2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business: Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both. 
3. Supply of goods— (a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or (b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal. 
4. Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business.

• Supply is done in course of furtherance of business

GST is essentially a tax only on commercial transactions. Hence, only those supplies that are in the course or furtherance of business qualify as supply under GST. Hence, any supplies made by an individual in his personal capacity do not come under the ambit of GST unless they fall within the definition of business as defined in the Act. Sale of goods or service even as a vocation is a supply under GST. Therefore, even if a famous politician paints paintings for charity and sells the paintings even as a one-time occurrence, the sale would constitute supply. 

However, there is one exception to this ‘Course or Furtherance of Business’ rule i.e., import of services for a consideration.

If the aforementioned elements are not met with, it is not considered as a sale.

Examples:

• Mr. A buys a table for Rs.10,000 for his personal use and sells it off after 10 months of use to a dealer. This is not considered as supply under CGST as this is not done by Mr A for the furtherance of business.
• Mrs. B provides free coaching to neighbouring students as a hobby. This is not considered as supply as this act is not performed for a consideration.

However, as specified in Schedule I of GST Act, certain activities are considered as supply even if it is made without consideration. 

5. Classification of supply and types

1. Taxable Supply 

For a supply to attract GST, the supply must be taxable. Taxable supply has been broadly defined and means any supply of goods or services or both which, is leviable to tax under the Act. Exemptions may be provided to the specified goods or services or to a specified category of persons/ entities making supply.

2. Supply in the Taxable Territory 

For a supply to attract GST, the place of supply should be in India except for the State of Jammu and Kashmir. The place of supply of any goods or services is determined based on Sections 10, 11, 12 and 13 of IGST Act 2017.

3. Inter/Intra State Supply 

The location of the supplier and the place of supply determines whether a supply is treated as an Intra State supply or an Inter State supply. Determination of the nature of supply is essential to ascertain whether integrated tax is to be paid or Central plus State tax are to be paid. Inter- State supply of goods means a supply of goods where the location of the supplier and place of supply are in different States or Union territories. Intra State supply of goods means supply of goods where the location of the supplier and the place of supply are in the same State or Union territory. Imports, Supplies from and to SEZs are treated as deemed Inter-State supplies.

4. Composite supply and Mixed Supply:

There are a few supplies which are made together with two or more items. Such supplies are further classified into Composite Supply and Mixed Supply.   

A supply comprising of two or more goods/services, which are necessarily supplied in conjunction with each other as per frequent business practices followed in that area. In other words, these items cannot be supplied individually. There is a principal supply and a secondary supply in the whole transaction. In such cases, the tax rate on principal supply will apply to the entire supply. 

E.g. Buying a Dry Fruit Gift Box for Diwali. It includes dry fruits, a box, and a wrapper. Box and wrapper cannot be sold individually without the main content which is dry fruit. This is a composite supply. 

A supply comprising of two or more goods/services, wherein the supplies are independent of each other and are not necessarily required to be sold together is called a mixed supply. The first condition to be met for mixed supply is that ‘it should not be a composite supply’. In such cases, the tax rate that is higher of the two supplies will be applicable to the entire supply. 

E.g Buying a Christmas package consisting of cakes, aerated drinks, chocolates, Santa caps, and other gift items. Each of these items can be sold separately and are not dependent on each other. This is a mixed supply.  

The GST Law lays down the tax liability on a composite or mixed supply in the following manner. 

1. Composite Supply comprising two or more supplies one of which, is a principal supply, shall be treated as supply of such principal supply. 
2. Mixed Supply comprising two or more supplies, shall be treated as supply of that particular supply which attracts the highest rate of tax.

5. Import of services:

Import of goods/services with consideration is considered as supply whether for personal or business use.

6. Time of Supply

Time of supply is crucial for determining when goods and services are considered sold or supplied. It helps sellers determine the due date for their GST liability payment. The time of supply differs for goods and services.

For goods, the time of supply is the earliest of the following:

• Date of invoice issuance
• Date of payment/advance receipt
• Last date for invoice issuance

For services, the time of supply is the earliest of the following:

• Invoice issuance date
• Payment/advance receipt date

• Date of service provision (if invoice not issued within the prescribed time)

Under the reverse charge mechanism, the time of supply for the service recipient is the earliest of:

• Payment date
• 30 days from the invoice issuance date for goods (60 days for services)

1. Time of Supply Under GST

In the realm of Goods and Services Tax (GST), understanding the concept of “Time of Supply” is crucial for accurate compliance and efficient financial management. Time of Supply signifies the point at which a transaction is considered to be liable for GST.

2. Significance of Time of Supply

Time of Supply plays a pivotal role in GST as it determines the applicable tax rate, the date when tax liability arises, and the time when businesses can claim Input Tax Credit (ITC). Accurate identification of the Time of Supply ensures that businesses meet their tax obligations in a timely manner, thus contributing to a seamless and transparent tax regime.

3. Determining Time of Supply

The Time of Supply under GST is determined based on the earliest of the following events:

1. Invoice Issuance

For supply of goods, Time of Supply is the date of issuance of the tax invoice or the date of receipt of payment, whichever is earlier.

2. Continuous Supply

In the case of continuous supply, like services provided under a contract, Time of Supply is determined by the earliest of the dates of issuance of invoice or completion of supply.

3. Unregistered Recipient

If the recipient is unregistered and the invoice is issued within 30 days from the supply date, Time of Supply is the date of supply. If the invoice is not issued within 30 days, Time of Supply is the date of issuance of the invoice.

4. Reverse Charge Mechanism

For supplies under the reverse charge mechanism, Time of Supply is the earliest of the date of payment or the date immediately following 60 days from the date of issue of invoice.

4. Implications for Businesses

Understanding Time of Supply has significant implications for businesses:

1. Tax Liability

Businesses must calculate and pay GST based on the correct Time of Supply to avoid penalties and interest charges.

2. Input Tax Credit (ITC)

The eligibility to claim ITC depends on the Time of Supply. Proper determination ensures accurate ITC claims.

3. Cash Flow Management

Knowing the Time of Supply helps businesses plan for the outflow of taxes, ensuring optimal cash flow management.

5. Compliance Tips

Time of Supply is a cornerstone in the GST framework, impacting taxation, compliance, and financial operations of businesses. By mastering this concept and adhering to its determination guidelines, businesses can ensure seamless GST compliance, optimize tax planning, and streamline their operations.

1. Accurate Record Keeping

Maintain meticulous records of invoices, payments, and supply dates to correctly determine Time of Supply.

2. Automated Systems

Utilize accounting software to automate the calculation of Time of Supply and facilitate accurate GST filing.

3. Regular Review

Periodically review transactions to ensure Time of Supply is correctly determined, especially for continuous supplies.

7. Place of Supply

The place of supply is crucial for determining the nature of supply (intrastate or interstate) and the applicable GST.

1 Place of Supply of Goods

1. Domestic Transactions:

• • Supply Involving Movement of Goods: The place of supply is the location where the movement of goods terminates for delivery to the recipient.
  • Supply without Movement of Goods: The place of supply is the location of the goods at the time of the delivery to the recipient.
  • Goods Assembled or Installed: The place of supply is the place of such installation or assembly.
  • Goods Supplied on Board a Conveyance: The place of supply is the location at which such goods are taken on board.

2. International Transactions:

• • Export of Goods: The place of supply is the location outside India where the goods are exported.
  • Import of Goods: The place of supply is the location in India where the goods are imported.

2 Place of Supply of Services

• General Rule: The place of supply of services is the location of the recipient of services. If the recipient’s location is not available, the place of supply is the location of the supplier.
• Specific Cases:
  • Immovable Property Services: The place of supply is where the immovable property is located.
  • Restaurant and Catering Services: The place of supply is where the services are actually performed.
  • Admission to Events: The place of supply is where the event is actually held.
  • Transportation of Goods: The place of supply is the destination of the goods.
  • Telecommunication Services: The place of supply varies based on the service type (fixed line, mobile, DTH).

2. Significance of Place of Supply

Place of Supply is a fundamental concept that determines whether a supply is deemed to be an intra-state or inter-state transaction. This, in turn, affects the applicability of Central GST (CGST) and State GST (SGST) or Integrated GST (IGST). Accurate determination of Place of Supply ensures the correct allocation of tax revenue among states and fosters a fair and transparent tax system.

3. Determining Place of Supply

Place of Supply under GST is determined based on the nature of the supply and the location of the supplier and the recipient. Several scenarios dictate the Place of Supply:

1. Supply of Goods: 

The Place of Supply is the location where the goods are delivered or made available to the recipient.

2. Supply of Services: 

The Place of Supply varies based on the type of service, such as the location of the recipient, the location of the supplier, or the location of the immovable property, if relevant.

4. Implications for Businesses

Understanding Place of Supply has several implications for businesses:

1. Correct Tax Calculation: 

Accurate determination of Place of Supply ensures the correct application of CGST, SGST, or IGST, preventing potential tax discrepancies.

2. Input Tax Credit (ITC): 

Proper identification of the Place of Supply is essential for claiming ITC on taxes paid.

3. Cross-Border Transactions: 

For inter-state supplies, IGST is applicable, simplifying tax payment for businesses engaged in cross-border trade.

4. Compliance Strategies

To navigate Place of Supply effectively and ensure compliance, businesses can adopt these strategies:

1. Stay Updated: 

Regularly review GST guidelines and notifications to stay informed about any changes in Place of Supply rules.

2. Document Verification: 

Maintain comprehensive records of transactions and related documents to accurately determine the Place of Supply.

3. Professional Guidance: 

Seek advice from tax experts or consultants to navigate complex scenarios and ensure correct tax treatment.

Place of Supply under GST is a cornerstone of accurate tax assessment and compliance. By understanding its significance, grasping the determination factors, and implementing effective compliance strategies, businesses can ensure smooth operations, optimal tax planning, and transparent financial practices.

Place of Supply is a fundamental concept that shapes accurate tax assessment and compliance under GST. By comprehending its significance, understanding the factors influencing determination, and implementing effective compliance strategies, businesses can navigate the intricacies of intra-state and inter-state transactions with confidence.

8. Value of Supply

The “Value of Supply” refers to the amount collected by a seller for the goods supplied or services provided. It is crucial to determine the value accurately to calculate the correct GST amount.

1. Value of Supply Under GST

The Goods and Services Tax (GST) system has ushered in a new era of taxation in India, streamlining the way goods and services are taxed. Central to this taxation framework is the concept of “Value of Supply,” which forms the basis for determining the applicable tax liability.

2. Significance of Value of Supply

Value of Supply is a critical concept in the GST framework:

1. Tax Liability Determination: 

The value of supply serves as the foundation for calculating the applicable GST rate and, subsequently, the tax liability.

2. Uniform Taxation: 

A standardized method for calculating the value of supply ensures consistency and transparency in the taxation of goods and services.

3. Methods of Calculating Value of Supply

Under GST, there are several methods for determining the value of supply:

1. Transaction Value: 

The most common method, it is the actual price paid or payable for the goods or services, including all costs and charges.

2. Open Market Value: 

In cases where the transaction value cannot be determined, the value is determined based on the open market value of similar supplies.

3. Value of Similar Supplies: 

If open market value is not available, the value is determined using the value of similar supplies adjusted for specific factors.

4. Cost-Plus Method: 

For services, the value of supply is calculated by adding a certain percentage of the cost to the supplier.

4. Implications for Businesses

Understanding the Value of Supply carries several implications for businesses:

1. Accurate Tax Calculation: 

Correct calculation of the value of supply ensures precise tax assessment, avoiding underpayment or overpayment of taxes.

2. Input Tax Credit (ITC): 

Accurate determination of the value of supply is crucial for claiming ITC on taxes paid.

3. Uniform Treatment: 

A standardized value calculation method promotes uniform treatment of similar supplies, preventing ambiguity and disputes.

5. Compliance Strategies

To navigate the concept of Value of Supply and ensure compliance, businesses can adopt these strategies:

1. Documentation: 

Maintain comprehensive records of transactions, invoices, and relevant documents to accurately calculate the value of supply.

2. Regular Review: 

Periodically review transactions to ensure that the correct value calculation method is being applied.

3. Expert Advice: 

Seek guidance from tax professionals or consultants to navigate complex scenarios and ensure accurate value determination.

9. Intrastate and Interstate Supply

Intrastate Supply

• Definition: When the location of the supplier and the place of supply are in the same state or union territory.
• Tax Implications: Both CGST and SGST/UTGST are applicable.
  • Example: A supplier in Maharashtra sells goods to a buyer in Maharashtra; CGST and Maharashtra SGST are charged.

Interstate Supply

• Definition: When the location of the supplier and the place of supply are in different states or union territories.
• Tax Implications: IGST is applicable.
  • Example: A supplier in Maharashtra sells goods to a buyer in Gujarat; IGST is charged.

1. Threshold for Registration

Under GST, a business must register if its aggregate turnover exceeds the prescribed threshold limits. As of now, these limits are:

• For goods: ₹40 lakhs (₹20 lakhs for special category states)
• For services: ₹20 lakhs (₹10 lakhs for special category states)
• For both goods and services: ₹20 lakhs (₹10 lakhs for special category states)

2. Persons Liable for Registration

Regular Tax Payer

• A regular taxpayer is one who is required to file GST returns regularly and is entitled to input tax credit (ITC)
• In short a regular taxpayer is a person who regularly supplies goods and services and crosses the threshold limit for GST registration.
• They need to file monthly or quarterly returns depending on their turnover.

Composition Tax Payer

• A taxpayer with a turnover below ₹1.5 crore (₹75 lakhs for special category states) can opt for the Composition Scheme.
• These taxpayers pay a fixed percentage of turnover as tax and cannot claim input tax credit.
• They need to file quarterly returns.

Casual Taxable Person

• A person who occasionally supplies goods or services in a state or union territory where they do not have a fixed place of business.
• They are required to obtain temporary registration for the period during which they supply goods or services.

Non-resident Taxable Person

• A person who occasionally supplies goods or services in India but does not have a fixed place of business or residence in India.
• They need to register under GST and can avail temporary registration.

3. Persons Not Liable for Registration

• Persons engaged exclusively in supplying exempt goods/services.
• Agriculturists, to the extent of supply of produce out of cultivation of land.
• Persons whose aggregate turnover is below the threshold limit.
• Persons making supplies covered under reverse charge mechanism.
• Persons supplying goods/services that are not liable to tax or are entirely exempt from tax.
• Services by an employee to the employer in the course of or in relation to his employment.

4. Compulsory Registration in Certain Cases

Certain categories of persons are required to register under GST regardless of the threshold limit:

• Persons making inter-state taxable supply.
• Casual taxable persons.
• Non-resident taxable persons.
• Persons required to pay tax under reverse charge.
• Agents supplying goods/services on behalf of other taxable persons.
• E-commerce operators.
• Persons supplying goods/services through e-commerce operators.
• Persons required to deduct TDS under GST.
• Input Service Distributor (ISD).
• Persons making a taxable supply of goods/services on behalf of others whether as an agent or otherwise.

5. Manners for Registration under GST

• An application for registration is made using Form GST REG-01.
• For special category states, registration must be obtained within 30 days of the commencement of business.

6. Deemed Registration

If the proper officer does not take action on the registration application within three working days, the application for registration is deemed to be approved.

7. GST Registration for Casual Taxable or Non-resident Taxable Persons

• Casual taxable persons must apply for registration at least five days prior to the commencement of business using Form GST REG-01.
• A deposit equal to the estimated tax liability is required.
• Registration is valid for 90 days and can be extended for another 90 days.

8. Amendments of GST Registration

Amendments in registration details can be made by submitting Form GST REG-14, which must be approved by the proper officer within 15 days. Changes in business name, principal place of business, and details of partners/directors require approval.

9. Cancellation of GST Registration

• A taxpayer can apply for cancellation if the business is discontinued, transferred, or the turnover falls below the threshold limit.
• The proper officer can also initiate cancellation if the taxpayer contravenes provisions of GST.
• Cancellation does not affect the liability for acts done before the cancellation.

10. Revocation of Cancellation of GST Registration

If the registration is cancelled by the proper officer, the taxpayer can apply for revocation within 30 days from the date of cancellation order using Form GST REG-21.

11. Procedure for Registration

Application:

• The applicant must submit an online application using Form GST REG-01 through the GST portal (https://www.gst.gov.in/).
• Required documents include PAN, Aadhaar, proof of business address, bank account details, and photographs.

Verification:

• The application and documents are verified by GST authorities.
• Verification can be either automatic based on Aadhaar authentication or manual.

Approval:

• If verified, the GST officer issues the registration certificate (Form GST REG-06) within 3 working days.
• If further information or clarification is required, the officer may issue Form GST REG-03, and the applicant must respond using Form GST REG-04 within 7 working days.

Rejection:

• If discrepancies are found, and the applicant fails to respond or rectify them, the officer may reject the application using Form GST REG-05.

In short

• Log on to the GST portal (www.gst.gov.in).
• Fill Part-A of Form GST REG-01 and submit.
• A temporary reference number (TRN) will be generated.
• Use TRN to fill Part-B of Form GST REG-01.
• Verification of documents and approval by the proper officer.
• GSTIN is issued upon approval.

12. Unique Identification Number (UIN)

• Purpose: Assigned to entities like government bodies, UN agencies, embassies, and other notified entities to claim refunds of GST paid on inward supplies.
• Application: Entities must apply using Form GST REG-13.
• Format: Similar to GSTIN but specifically for entities eligible for tax refunds.

• UIN is a special classification of GST registration for entities such as government bodies, UN agencies, and other notified entities.
• It is used for claiming refunds of GST paid on purchases.

13. Who Can Apply for UIN under GST

• Foreign diplomatic missions and embassies.
• Consulates.
• United Nations organizations.
• Multilateral financial institutions.
• Specialized agencies of the United Nations.

14. Difference Between GSTIN and UIN

• GSTIN (Goods and Services Tax Identification Number): A unique 15-digit code assigned to regular taxpayers.
• UIN (Unique Identification Number): A unique number assigned to diplomatic missions, embassies, and other notified persons for claiming tax refunds.

15. Returns of UIN Holders

UIN holders must file GSTR-11 to claim a refund of taxes paid on inward supplies.

16. Registration Number Format

• The GSTIN (Goods and Services Tax Identification Number) is a 15-digit unique identification number assigned to each taxpayer.
• Format: 22AAAAA0000A1Z5
  • The first 2 digits represent the state code.
  • The next 10 digits are the PAN number of the taxpayer.
  • The 13th digit is based on the number of registrations by a business entity within a state.
  • The 14th digit is ‘Z’ by default.
  • The 15th digit is a checksum digit used for error detection.

1. Introduction

The GST Council is a crucial body established to ensure a smooth and uniform implementation of the Goods and Services Tax (GST) across India. It is responsible for making key decisions regarding the GST regime, including tax rates, exemptions, and administrative procedures.

2. Composition of the GST Council

1. Chairperson:
   • Union Finance Minister of India.

1. Members:

1. • Union Minister of State in charge of Revenue or Finance.
   • Finance Ministers or any other ministers nominated by each state government.

3. Structure

• The Council is a federal body that includes representatives from both the central and state governments, ensuring cooperative federalism in decision-making.

4. Functions of the GST Council

1. Tax Rates:
   • Recommends the tax rates for various goods and services.
   • Decides on the slabs under which different commodities fall.

1. Exemptions and Thresholds:

1. • Determines which goods and services are exempt from GST.
   • Sets the threshold limits for GST registration.

1. Model GST Laws:

1. • Formulates and amends the GST laws, rules, and regulations.

1. Place of Supply Rules:

1. • Defines the rules for determining the place of supply of goods and services, which is crucial for deciding the applicable GST (CGST, SGST, or IGST).

1. Special Provisions:

1. • Makes special provisions for specific states or regions, considering their unique economic conditions.

1. Compliance Procedures:

1. • Simplifies compliance procedures to make it easier for businesses to comply with GST laws.
   • Establishes the mechanism for filing returns, tax payments, and refunds.

1. Dispute Resolution:

1. • Provides recommendations for resolving disputes arising between states or between the center and states regarding GST.

5. Decision-Making Process

1. Quorum for Meetings:
   • At least 50% of the total members must be present to constitute a quorum for a meeting of the GST Council.

1. Voting Structure:

1. • Decisions of the GST Council require a three-fourth majority.
   • The central government’s vote counts as one-third of the total votes cast.
   • The votes of all state governments taken together count as two-thirds of the total votes cast.

1. Consensus-Based Approach:

1. • While the Council encourages a consensus-based approach, the weighted voting ensures that both the central and state governments have significant influence over the decisions.

6. Key Decisions by the GST Council

1. GST Rate Structure:

Established a multi-tier GST rate structure with rates of 0%, 5%, 12%, 18%, and 28%.

1. Introduction of E-Way Bill:

Implemented the E-Way Bill system for the smooth movement of goods across states.

1. Compliance Simplification:

Simplified the return filing process with the introduction of forms like GSTR-3B and the Quarterly Return Monthly Payment (QRMP) scheme.

1. Anti-Profiteering Rules:

Introduced measures to ensure that the reduction in GST rates or benefits of input tax credit are passed on to the consumers.

1. Compensation to States:

Formulated the mechanism for compensating states for any revenue loss arising from the implementation of GST for the first five years.

7.  Impact of the GST Council

1. Harmonization of Tax Rates:

Ensures uniform tax rates across the country, minimizing tax-related disputes and creating a common market.

1. Ease of Doing Business:

Simplified tax structure and compliance procedures have significantly reduced the compliance burden on businesses.

1. Revenue Efficiency:

Improved tax collection efficiency and increased revenue for both the central and state governments.

1. Cooperative Federalism:

Strengthened the spirit of cooperative federalism by ensuring that both central and state governments work together in the formulation and implementation of GST policies.

8.  Challenges Faced by the GST Council

1. Technical Glitches:

Initial technical issues with the GSTN portal impacted the smooth filing of returns and processing of refunds.

1. Rate Rationalization:

Continuous need for rate rationalization to address industry concerns and economic conditions.

1. State Revenue Concerns:

Addressing the concerns of states regarding revenue losses and ensuring timely compensation.

1. Compliance Burden:

Despite simplification efforts, small businesses still face challenges in complying with GST norms.

GST Network (GSTN)

1. Introduction

The Goods and Services Tax Network (GSTN) is a non-profit, non-government organization responsible for managing the entire IT system of the GST portal. This portal is the backbone of the GST regime in India, providing a single platform for taxpayers to register, file returns, make payments, and comply with various GST regulations.

2. Objectives of GSTN

1. Provide a Shared IT Infrastructure: To facilitate GST implementation, ensuring a seamless flow of information between the Central Government, State Governments, taxpayers, and other stakeholders.
2. Ease of Compliance: Simplifying the process of tax administration and compliance for taxpayers.
3. Transparency and Efficiency: Enhancing transparency in the tax administration system and improving the efficiency of tax collection.

3. Structure of GSTN

• Ownership: GSTN is a private company with the central and state governments holding a 49% stake collectively, and private financial institutions owning the remaining 51%.
• Board of Directors: The board comprises representatives from both the central and state governments and private stakeholders.

4. Key Functions of GSTN

1. Registration: Enabling taxpayers to register under GST through an online portal.
2. Return Filing: Providing an interface for taxpayers to file various GST returns.
3. Payment Processing: Facilitating the payment of taxes through integrated payment gateways.
4. Invoicing and Billing: Offering tools for generating and managing GST-compliant invoices.
5. Data Management: Storing and managing vast amounts of transactional data securely.
6. Compliance Monitoring: Assisting tax authorities in monitoring compliance and identifying defaulters.
7. Analytics and Reporting: Providing analytical tools and reports for better tax administration.

5.  Features of GSTN Portal

1. User-Friendly Interface: Designed to be accessible and easy to use for taxpayers.
2. Mobile Application: Allows taxpayers to access GST services on their mobile devices.
3. Help Desk: Provides support to taxpayers through call centers and email.
4. Secure Transactions: Ensures secure handling of sensitive tax-related data.
5. Inter-Operability: Facilitates seamless data exchange between various stakeholders.

6.  Technology Stack

GSTN uses a robust technology stack that includes cloud computing, data analytics, and cybersecurity measures to handle large volumes of data and transactions securely and efficiently.

7.  Data Security and Privacy

1. Encryption: Data is encrypted to ensure privacy and security.
2. Access Controls: Strict access controls to protect sensitive information.
3. Regular Audits: Regular security audits to detect and mitigate vulnerabilities.

8. Impact of GSTN

1. Simplified Tax Compliance: Streamlined tax processes, reducing the burden on taxpayers.
2. Increased Transparency: Greater transparency in tax administration.
3. Revenue Enhancement: Improved tax collection efficiency, leading to increased revenue for the government.
4. Business Efficiency: Reduction in the complexity of tax compliance for businesses, fostering a more business-friendly environment.

9.  Challenges and Criticisms

1. Initial Hiccups: Technical glitches and initial implementation issues.
2. Data Privacy Concerns: Concerns about the security and privacy of sensitive taxpayer data.
3. Adaptation Issues: Difficulty for some taxpayers, especially small businesses, in adapting to the new system.

1. Introduction to GST

• Definition: GST is a comprehensive, multi-stage, destination-based tax that is levied on every value addition. It is a single tax on the supply of goods and services, right from the manufacturer to the consumer.
• Objective: To subsume various indirect taxes (like VAT, Service Tax, Excise Duty, etc.) into a single tax to create a common national market.

Goods and Services Tax (GST) is a tax that India imposes on the supply of specific products and services. The main aim of this taxation system is to curb the cascading effect of other indirect taxes.

2. What is GST in India?

Goods and Services Tax (GST) is an indirect tax that has replaced many previous indirect taxes in India, such as excise duty, VAT, and service tax. The GST Act was passed in Parliament on 29th March 2017 and came into effect on 1st July 2017.

In essence, GST is levied on the supply of goods and services. It is a comprehensive, multi-stage, destination-based tax applied at every stage of value addition. GST serves as a single domestic indirect tax law for the entire country.

Under the GST system, tax is imposed at each point of sale. For intra-state sales, both Central GST (CGST) and State GST (SGST) are charged. For inter-state sales, Integrated GST (IGST) is applied.

3.  History of Goods and Services Tax

On 1 July 2017, the Goods and Services Tax implemented in India. Given below is the history of how it came into effect:

• In 2000, Atal Bihari Vajpayee, then Prime Minister of India, set up a committee to draft the GST law.
• In 2004, a task force concluded that the new tax structure should be put in place to enhance the tax regime at the time.
• In 2006, Finance Minister proposed the introduction of GST from 1 April 2010 and
• In 2011 the Constitution Amendment Bill was passed to enable the introduction of the GST law.
• In 2012, the Standing Committee started discussions about GST, and tabled its report a year later.
• In 2014, the new Finance Minister at the time, Arun Jaitley, reintroduced the GST bill in Parliament and passed the bill in Lok Sabha in 2015. Yet, the implementation of the law was delayed as it was not passed in Rajya Sabha.
• GST went live in 2016, and the amended model GST law was passed in both the houses. The President of India also gave assent.

In 2017, 4 supplementary GST Bills in Lok Sabha was passed and the Cabinet approved the same. Rajya Sabha then passed 4 supplementary GST Bills and the new tax regime was implemented on 1 July 2017.

The following central taxes have been replaced by GST:

• Service tax
• Central excise duties
• Additional duties of excise
• Additional duty of customs
• Duties of excise
• Cess and surcharge

The state taxes subsumed by GST are as follows:

• Entry tax
• Luxury tax
• Central sales tax
• Purchase tax
• State VAT
• Entertainment tax
• State cess and surcharges
• Taxes on advertisements
• Taxes on gambling and lottery

4. Different Types of GST

There are four different components of GST such as CGST, SGST, IGST, and UTGST.

1. CGST: Central Goods and Services Tax (CGST) is charged on the intra-state supply of products and services.
2. SGST: State Goods and Services Tax (SGST) like CGST, is charged on the sale of products or services within a state.
3. IGST: Integrated Goods and Services Tax (IGST) is charged on inter-state transactions of products and services.
4. UTGST: Union Territory Goods and Services Tax is levied on the supply of products and services in any of the Union Territories in the country, viz. Andaman and Nicobar Islands, Daman and Diu, Dadra and Nagar Haveli, Lakshadweep, and Chandigarh. UTGST is levied along with CGST.

5. Key Terms in GST 

1. Supply

• Definition: Supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease, or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
• Types of Supply:
  • Taxable Supply: Supply of goods or services that are subject to GST.
  • Exempt Supply: Supply of goods or services that attract nil rate of tax or are fully exempt from GST.
  • Zero-rated Supply: Exports and supplies to SEZs are treated as zero-rated supplies.
  • Composite Supply: A supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, where one of which is a principal supply.
  • Mixed Supply: A supply made by a taxable person to a recipient consisting of two or more individual supplies of goods or services or any combination thereof, which are not naturally bundled and can be supplied independently.

2. Taxable Person

• Definition: A taxable person under GST is anyone who is registered or liable to be registered under GST. This includes individuals, companies, LLPs, partnerships, HUFs, trusts, and societies.
• Categories:
  • Regular Taxpayer: Anyone whose aggregate turnover exceeds the threshold limit prescribed under the GST Act.
  • Composition Dealer: A small taxpayer who can opt for the Composition Scheme to avoid the tedious formalities of GST and pay GST at a fixed rate on turnover.
  • Casual Taxable Person: Someone who occasionally undertakes supply of goods or services or both in a state or union territory where he/she has no fixed place of business.
  • Non-Resident Taxable Person: A person who occasionally undertakes supply of goods or services or both, but has no fixed place of business or residence in India.

3. Aggregate Turnover

• Definition: Aggregate turnover is the total value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both, and inter-state supplies of persons having the same Permanent Account Number (PAN), to be computed on an all-India basis but excludes central tax, state tax, union territory tax, integrated tax, and cess.
• Components:
  • Taxable Supplies: Supplies on which GST is payable.
  • Exempt Supplies: Supplies that are not subject to GST.
  • Exports: Supply of goods or services outside India.
  • Inter-State Supplies: Supplies between different states or union territories within India.

4. Input Tax Credit (ITC)

• Definition: ITC is the credit a business can claim for the GST paid on purchase of goods or services used in the course of business. It allows the offset of tax paid on inputs against the tax payable on outputs, thus preventing the cascading effect of taxes.
• Eligibility:
  • The recipient should be in possession of a tax invoice or debit note issued by a registered supplier.
  • The recipient should have received the goods or services.
  • The tax charged on the supply has been actually paid to the government, either in cash or through utilization of ITC.
  • The recipient has filed the necessary GST returns.
• Blocked Credits: Certain goods and services are ineligible for ITC, such as motor vehicles, food and beverages, beauty treatment, health services, etc., unless used for making a further supply of the same category.

5. Place of Supply

• Importance: The place of supply determines the type of GST (CGST, SGST, or IGST) to be levied.
• Rules for Goods:
  • Domestic Supply: The location where the goods are delivered.
  • Imports: The location of the importer.
  • Exports: The location outside India.
• Rules for Services:
  • Domestic Supply: The location of the service recipient.
  • International Supply: The location of the service recipient, if outside India.
  • Performance-based Services: The location where the services are actually performed.

6. Reverse Charge Mechanism (RCM)

• Definition: Under the reverse charge mechanism, the recipient of goods or services is liable to pay GST instead of the supplier.
• Applicability:
  • Supply of specified goods or services.
  • Supply by an unregistered dealer to a registered dealer.
  • Certain notified categories of supply.

6. Understanding GST in Detail 

1. Multi-stage Taxation

An item passes through various stages along its supply chain, from manufacture to final sale to the consumer. These stages include:

• Buying of raw materials
• Manufacture or production
• Warehousing of finished goods
• Selling to wholesalers
• Sale to retailers
• Selling to end customers

GST is levied at each of these stages, ensuring that tax is collected on the value added at every point in the supply chain.

2. Value Addition in GST

Understanding Value Addition

Under the GST system, value addition occurs at multiple stages as a product moves along the supply chain. For example, consider a manufacturer who produces cookies: 

• Manufacturing Stage: The manufacturer purchases flour, sugar, and other materials. The value of these inputs increases when they are mixed and baked into cookies.
• Warehousing Stage: The manufacturer sells the biscuits to a warehousing agent, who packs them into cartons and labels them, adding further value.
• Retail Stage: The warehousing agent then sells the cartons to a retailer. The retailer packages the cookies in smaller quantities and invests in marketing, further enhancing their value.

GST is levied on the value added at each of these stages, capturing the monetary value added from the purchase of raw materials to the final sale to the consumer. 

3. Destination-Based Tax

GST is a destination-based tax, meaning it is levied at the point of consumption. For instance, if goods are manufactured in Karnataka and sold to a consumer in West Bengal, the tax revenue from GST will be allocated to West Bengal, where the goods are consumed, rather than Karnataka, where they were produced.

7. GST Objectives

The objectives of GST are given below:

1. Simplification and Standardisation:

GST replaced multiple indirect taxes that existed under the previous tax regime. By implementing a single tax, it ensures uniform rates across states for the same product or service. This simplifies tax administration, with the Central Government setting the rates and policies. Common laws, such as e-way bills for goods transport and e-invoicing for transaction reporting, streamline the process. Tax compliance is also improved as taxpayers are no longer burdened with multiple return forms and deadlines, creating a unified system of indirect tax compliance.

1. Including Principal Indirect Taxes:

Prior to GST, India had numerous indirect taxes like service tax, VAT, and Central Excise, levied at various stages of the supply chain. These taxes were governed either by the states or the Centre, leading to a fragmented system. GST consolidated these major indirect taxes into one, significantly reducing the compliance burden on taxpayers and simplifying tax administration for the government.

1. Removing the Cascading Effect of Taxes:

One key objective of GST was to eliminate the cascading effect of taxes. Previously, taxpayers could not offset tax credits from one tax against another, such as excise duties against VAT, leading to a tax-on-tax scenario. Under GST, tax is levied only on the net value added at each stage of the supply chain, facilitating the seamless flow of input tax credits across both goods and services.

1. Reducing Tax Evasion:

GST laws are more stringent than previous indirect tax laws. Taxpayers can claim an input tax credit only on invoices uploaded by their suppliers, minimizing the chances of fraudulent claims. The introduction of e-invoicing further supports this goal. With GST being a nationwide tax and having a centralized surveillance system, defaulters are identified and dealt with more efficiently, thereby reducing tax evasion and fraud.

1. Expanding the Taxpayer Base:

GST has widened the tax base in India. Previously, different tax laws had varied threshold limits for registration based on turnover. As a consolidated tax on both goods and services, GST has increased the number of tax-registered businesses. Stricter input tax credit laws have also brought certain unorganized sectors, like the construction industry, under the tax net.

1. Enhancing Ease of Doing Business:

Under the previous regime, taxpayers faced difficulties dealing with different tax authorities. Although return filing was online, most assessments and refunds were handled offline. GST procedures are now almost entirely online, from registration to return filing, refunds, and e-way bill generation. This shift has significantly simplified compliance and improved the ease of doing business in India. The government plans to introduce a centralized portal for all indirect tax compliance, further streamlining processes.

7. Improving Logistics and Distribution:

A single indirect tax system reduces the need for multiple documentation for goods supply. GST minimizes transportation cycle times, enhances supply chain efficiency, and leads to warehouse consolidation. The e-way bill system and the removal of interstate checkpoints have improved transit and destination efficiency, reducing logistics and warehousing costs.

8. Promoting Competitive Pricing and Increasing Consumption:

GST has led to increased consumption and higher indirect tax revenues. The previous cascading tax regime made goods in India more expensive than in global markets. Uniform GST rates have promoted competitive pricing across India and on the global front. This has increased consumption, contributing to higher revenues and achieving another important objective of GST.

8.  Features or Characteristics of GST with Explanations

1. Comprehensive Tax

GST is a comprehensive tax that covers all goods and services except those specifically exempted. It replaces multiple indirect taxes previously levied by both the Central and State Governments.

2. Multi-Stage Tax

GST is levied at every stage of the production process, but is designed to be paid by the final consumer. Each stage of production and distribution chain from the manufacturer to the retailer pays GST on the value added to the product.

3. Destination-Based Taxation

GST is collected at the point of consumption rather than at the point of origin. This means the tax revenue goes to the state where the goods or services are consumed, not where they are produced.

4. Dual GST Model

In India, GST is implemented in a dual model where both the central and state governments levy GST on a common tax base. The components are:

• • Central GST (CGST): Collected by the Central Government on intra-state sales.
  • State GST (SGST): Collected by the State Government on intra-state sales.
  • Integrated GST (IGST): Collected by the Central Government on inter-state sales and imports.

5. Subsuming Multiple Taxes

GST has replaced several indirect taxes that were previously levied by both the central and state governments, including:

• • Central Excise Duty
  • Service Tax
  • VAT/Sales Tax
  • Central Sales Tax (CST)
  • Entertainment Tax
  • Luxury Tax

6. Input Tax Credit (ITC)

Businesses can claim credit for the tax paid on purchases (inputs), which can be used to offset the tax liability on sales (outputs). This helps in avoiding the cascading effect of taxes, where tax is levied on tax.

7. Tax Rates Structure

GST has multiple tax rates to accommodate various types of goods and services:

• • 0%: Essential goods like fresh fruits, vegetables, milk, etc.
  • 5%: Mass consumption goods like spices, tea, coffee, etc.
  • 12%: Standard goods like computers, processed foods, etc.
  • 18%: Consumer durables like soaps, capital goods, etc.
  • 28%: Luxury items like ACs, refrigerators, premium cars, etc.

8. Simplified Tax Compliance

GST aims to simplify tax compliance with uniform procedures for registration, tax payment, return filing, and refund processing through a unified IT system, the GST Network (GSTN).

9. E-Way Bill System

To ensure smooth movement of goods across states, GST introduced the E-Way Bill system, which is an electronic document required for the movement of goods above a certain value.

10. GST Council

The GST Council is the governing body for GST implementation and regulation. It consists of the Union Finance Minister, the Union Minister of State for Finance, and the Finance Ministers of all states. The Council makes recommendations on tax rates, exemptions, and other key aspects of GST.

11. Anti-Profiteering Measures

GST includes provisions to ensure that the reduction in tax rates or the benefit of input tax credits is passed on to consumers by way of a commensurate reduction in prices.

12. Composition Scheme

To reduce the compliance burden for small taxpayers, the Composition Scheme allows them to pay tax at a fixed rate on turnover and file quarterly returns instead of monthly returns. This scheme is available for businesses with an annual turnover up to a specified limit.

13. Reverse Charge Mechanism (RCM)

Under certain circumstances, the recipient of goods or services is liable to pay GST instead of the supplier. This mechanism is used to tax unregistered dealers and specified categories of supply.

9.  Advantages of GST

The following are the advantages of goods and services tax in India:

1. Elimination of the Cascading Tax Effect: The introduction of GST has removed the need for filing several tax returns. This has eliminated the cascading effect. For instance, before the introduction of GST, entities had to file separate returns and comply with regulations for service tax and VAT. This simplified the process for filing input tax credit claims, as only one return is required.

2. Regulation of the Unorganised Sector: The online compliance, payment, and claim processes are all streamlined by the GST bill. Additionally, it benefits the unorganised sector by directly regulating it under rules governing goods and services taxes.

3. A Uniform Tax System: GST has unified the tax system across the nation. It makes it easier for laws, procedures, and tax rates to be consistent throughout India. The GST composition scheme is now available to all small businesses. Small businesses having an annual turnover of up to Rs.1.5 crore (or Rs.75 lakh in special category states) can apply for benefits under this scheme. Businesses can lower their taxes through the GST composition scheme.

4. Streamlined GST Online Process: GSTR filing and registration are among the procedures that can be done online. This has greatly streamlined the procedure and allowed startups to easily register for GST services in one location. In addition to these advantages, the GST bill replaced 17 different indirect taxes with a single, unified tax. Both the central and state governments have received more revenue as a result of the reduced price of goods and increased demand for them.

1. Direct Tax – Meaning, Types & Tax Rates

A type of tax where the impact and the incidence fall under the same category can be defined as a Direct Tax.

The tax is paid directly by the organisation or an individual to the entity that has imposed the payment. The tax must be paid directly to the government and cannot be paid to anyone else.

1.1 Types of Direct Taxes

The various types of direct tax that are imposed in India are mentioned below:

1. Income Tax: Depending on an individual’s age and earnings, income tax must be paid. Various tax slabs are determined by the Government of India which determines the amount of Income Tax that must be paid. The taxpayer must file Income Tax Returns (ITR) on a yearly basis. Individuals may receive a refund or might have to pay a tax depending on their ITR. Huge penalties are levied in case individuals do not file ITR.
2. Wealth Tax: The tax must be paid on a yearly basis and depends on the ownership of properties and the market value of the property. In case an individual owns a property, wealth tax must be paid and does not depend on whether the property generates an income or not. Corporate taxpayers, Hindu Undivided Families (HUFs), and individuals must pay wealth tax depending on their residential status. Payment of wealth tax is exempt for assets like gold deposit bonds, stock holdings, house property, commercial property that have been rented for more than 300 days, and if the house property is owned for business and professional use.
3. Estate Tax: It is also called as Inheritance Tax and is paid based on the value of the estate or the money that an individual has left after his/her death.
4. Corporate Tax: Domestic companies, apart from shareholders, will have to pay corporate tax. Foreign corporations who make an income in India will also have to pay corporate tax. Income earned via selling assets, technical service fees, dividends, royalties, or interest that is based in India are taxable. The below-mentioned taxes are also included under Corporate Tax:

• • Securities Transaction Tax (STT): The tax must be paid for any income that is earned via security transactions that are taxable.
  • Dividend Distribution Tax (DDT): In case any domestic companies declare, distribute, or are paid any amounts as dividends by shareholders, DDT is levied on them. However, DDT is not levied on foreign companies.
  • Fringe Benefits Tax: Companies that provide fringe benefits for maids, drivers, etc., Fringe Benefits Tax is levied on them.
  • Minimum Alternate Tax (MAT): For zero tax companies that have accounts prepared according to the Companies Act, MAT is levied on them.

1. Capital Gains Tax: It is a form of direct tax that is paid due to the income that is earned from the sale of assets or investments. Investments in farms, bonds, shares, businesses, art, and home come under capital assets. Based on its holding period, tax can be classified into long-term and short-term. Any assets, apart from securities, that are sold within 36 months from the time they were acquired come under short-term gains. Long-term assets are levied if any income is generated from the sale of properties that have been held for a duration of more than 36 months.

1.2 Tax Rate for the Different Types of Direct Tax

A. Income Tax:

Depending on the individual’s age and salary, he/she will fall under a particular tax slab. The three different tax slabs are mentioned below:

1. For resident individuals and Hindu Undivided Families (HUFs) who are below the age of 60 years:

2. For senior citizens who are above the age of 60 years and below the age of 80 years:

3. For resident Indians who are above the age of 80 years (Super Senior Citizen):

In addition to the existing tax slabs mentioned above, the Finance Minister Nirmala Sitharaman has introduced a new tax regime on 1st February 2020. However, it should be kept in mind that the new income tax regime is optional and is an alternative for the existing income tax regime. The income tax slabs for the FY 2020-21 under the new regime can be summed up as follows:

New Income Tax Slab for Individuals

Note: The income tax rates mentioned above are optional.

B. Corporate Tax:

The tax rates for domestic and international companies are mentioned below:

Domestic companies:

• In case the turnover of the company is less than Rs.250 crore, the corporate tax that is levied is 25%. However, if the turnover of the company is more Rs.250 crore, the corporate tax that is levied is 30%.
• A surcharge of 10% of the taxable income is levied in case the taxable income is between Rs.1 crore and Rs.10 crore.
• In case the taxable income of the company is more than Rs.10 crore, the surcharge that is levied is 12%.
• 4% of the corporate tax is levied as cess.

International companies:

• In case companies are earning less than Rs.1 crore, a corporate tax of 41.2% is levied. The corporate tax includes 40% basic tax and 3% education cess.
• In case companies are earning more than Rs.1 crore, a corporate tax of 42.024% is levied. The corporate tax includes 40% basic tax, 2% surcharge, and 3% education cess.
• In case companies earn more than Rs.10 crore, a surcharge of 5% is levied apart from the basic tax. 

C. Capital Gains Tax

• According to the normal tax slabs, short-term capital gains is levied.
• In case Capital Gains Tax is computed considering indexation benefit, the long-term capital gains that are levied are taxed as 20%.
• In case Capital Gains Tax is computed without considering indexation benefit, the long-term capital gains that are levied are taxed at 10%

D. Wealth Tax

• Depending on the net wealth, Wealth Tax is levied. Net wealth can be calculated by the sum of all taxable assets minus the total debt that is owed.
• The formula for net wealth is, Net Wealth = (Sum of all assets) – (sum of all debt).
• The value of net wealth is considered on March 31 of every year that immediately precedes the assessment year.
• However, with effect from 1 April 2016, for wealth that was being held as of 31 March 2016, Wealth Tax has been abolished.

E. Direct Tax Code

The Direct Tax Code or DTC was mainly drafted to replace the Income Tax Act of 1961. The main aim of DTC is to establish a more equitable, effective, and efficient direct tax system. DTC was also drafted to amend and stabilise all laws that are related to direct taxes so that the tax-GDP ratio increases and voluntary compliance becomes easy.

Explanation of the Direct Tax Codes

The key features of the Direct Tax Code are explained below:

• All direct taxes have a single code: By bringing all direct taxes under one code, a single, unified taxpayer system can be brought into effect. All compliance features can also be unified under one code.
• Stability: Currently, based on the Finance Act of the relevant year, taxes are formed. However, under the Direct Tax Code, the tax rates are being made between the First and Fourth schedule of the DTC. Any changes to the schedule can be made by passing an Amendment Bill before the Parliament.
• Regulatory Functions are eliminated: Other regulatory authorities must handle all regulatory functions.
• Political contributions: 5% of the gross total income that can be deducted will be made towards political contributions.
• Flexibility: A law has been created so that changes and requirement to grow the economy can be accommodated without having to make amendments on a constant basis.
• Constant litigation problems have been eliminated: Special care has been put forth so that the code is not misused or misinterpreted in order to avoid contradiction and ambiguity.
• Fringe benefits tax: The tax is levied on employees rather than employers.

1.3 Advantages of Direct Taxes

The main advantages of Direct Taxes in India are mentioned below:

• Economic and Social balance: The Government of India has launched well-balanced tax slabs depending on an individual’s earnings and age. The tax slabs are also determined based on the economic situation of the country. Exemptions are also put in place so that all income inequalities are balanced out.
• Productivity: As there is a growth in the number of people who work and community, the returns from direct taxes also increases. Therefore, direct taxes are considered to be very productive.
• Inflation is curbed: Tax is increased by the government during inflation. The increase in taxes reduces the necessity for goods and services, which leads to inflation to compress.
• Certainty: Due to the presence of direct taxes, there is a sense of certainty from the government and the taxpayer. The amount that must be paid and the amount that must be collected is known by the taxpayer and the government, respectively.
• Distribution of wealth is equal: Higher taxes are charged by the government to the individuals or organisations that can afford them. This extra money is used to help the poor and lower societies in India.

Even though there are a few disadvantages, direct taxes play a very important role in India’s economy. If these taxes are brought into effect appropriately, they could play a huge role in sustaining price levels and to prevent inflation.

2. Indirect Tax

Indirect tax is something that a manufacturer pays to the Government of his country. The burden of tax payment is on the end consumer as they are the ones purchasing the products. Unlike direct taxes, these are levied on materialistic goods.

2.1 What is Indirect Tax?

The tax imposed on the use of products and services is known as an indirect tax. It is not imposed directly on an individual’s income. Rather, in addition to the cost of the products or services the seller purchased, they must also pay the tax. A single party in the supply chain, like a manufacturer or retailer, collects and pays the government an indirect tax.

However, the manufacturer or retailer includes the tax on the price that the customer must pay when purchasing a good or service. In the end, the tax is paid by the customer by increasing the cost of the product.

Examples of an Indirect Tax

Excise Duty, Customs Duty, Entertainment Tax, Service Tax, Sales Tax, Gross Receipts Tax  and Value-Added Tax (VAT) are examples of Indirect taxes.

An example of GST (Indirect tax): Explanation

Let’s say you eat at a restaurant. You could see your entire payment plus the GST on the bill (Indirect tax). The GST rate is 5%, so let’s say the total was Rs.2500. Then, you will be required to pay Rs.2625(2500+125). The service provider passes on the indirect tax to you in the amount of Rs.125.

2.2 Overview of Indirect Tax in India

There are many indirect taxes applied by the government of India. Taxes are levied on manufacture, sale, import and even purchases of goods and services. These laws aren’t also well-defined Acts from the government, rather orders, circulars and notifications are given out by relevant government bodies to this end. As such, it can be cumbersome trying to understand every feature of indirect taxes in India.

Indirect taxes are touted to be streamlined following the introduction of the uniform Goods and Services Tax (GST). The points below will help you understand more about the types of indirect taxes and where they are applicable from a consumer’s perspective.

2.3 Different Types of Indirect Taxes

There are different types of indirect tax in India. However, after the implementation of GST, all these indirect taxes were bundled into one singular tax for the citizens of India. We will have a look at the different types of indirect tax in India:

1. Service tax: This tax is levied by an entity in return for the service provided by them. The service tax is collected by the Government of India and deposited with them.
2. Excise duty: When any product or good is manufactured by a company in India, then the tax levied on those goods is called the Excise Duty. The manufacturing company pays the tax on the goods and in turn recover the amount from their customers.
3. Value Added Tax: Also known as VAT, this type of tax is levied on any product sold directly to customer and are movable. VAT consists of Central Sales Tax which is paid to the Government of India State Central Sales Tax which is paid to the respective State Government.
4. Custom Duty: This a tax levied on the goods imported to India. Sometimes, Custome Duty is also levied on products which are exported out of India.
5. Stamp Duty: This is a tax levied on the transfer of any immovable property in a state of India. The state government in whose state the property is located charges this type of tax. Stamp tax is also applicable on all legal documents too.
6. Entertainment Tax: This tax is charged by the state government and is applicable on any products or transactions related to entertainment. Purchasing of any video games, movie shows, sports activities, arcades, amusement parks, etc. are some of the products on which Entertainment Tax is charged.
7. Securities Transaction Tax: This tax is levied during the trading of securities through Indian Stock Exchange.

2.4 Features of Indirect Tax

Here are the key features of indirect taxes:

1. Tax liability: The service provider or seller pays indirect taxes to the government, and the liability is transferred to the consumer.
2. Payment of tax: The seller pays indirect taxes to the government and the same is transferred to the consumer.
3. Nature: Indirect taxes were initially regressive in nature, but thanks to the implementation of the Goods and Services Tax, they are now pretty progressive.
4. Saving and investment: Indirect taxes are generally growth-oriented considering the fact that they encourage consumers to save and invest.
5. Evasion: It is difficult to evade indirect taxes because they are now implemented directly through products and services.

2.5 Advantages of Indirect Tax

Here are the main advantages of indirect taxes

1. Convenience: Indirect taxes do not burden the taxpayer and are convenient as they are paid only at the time of making a purchase. Moreover, state authorities find it convenient to levy indirect taxes because they are collected directly at the stores/factories which helps in saving a lot of time and effort.
2. Ease of collection: Indirect taxes are easy to collect in comparison with direct taxes. Since indirect taxes are only collected at the time of making purchases, the authorities need not worry about their collection.
3. Collection from the poor: Those who earn less than Rs.2.5 lakh p.a. are exempt from income tax, which means that they do not contribute to the government. Since indirect taxes are charged at the point of sale, all individuals, regardless of the income tax slab under which they fall, contribute towards the growth of the economy.
4. Equitable contributions: Indirect taxes are directly related to the costs of products and services. What this essentially means that the basic necessities attract lower rates of tax while luxury items are charged at higher tax rates, thereby ensuring that contributions are equitable.
5. Reduce Negative Consumption: The highest indirect taxes are placed on goods that are bad for our health, like alcohol, tobacco and other similar products. Thus, they are more expensive which helps curb the spending and consumption of such harmful commodities. 

2.6 Disadvantages of Indirect Tax

Some of the disadvantages of Indirect Tax are given below:

1. Indirect Tax charged sometimes are cumulative. This means that in a point-based transaction system, middlemen involved are likely to charge their own service tax which may result in the overall price of the product increasing.
2. Indirect Tax can be regressive in nature. For example, salt tax remains the same for both poor and rich, However, if a rich person defaults the payment, then the penalties imposed will be higher as well.
3. Indirect Tax are not industry friendly. Taxes are levied on raw materials and goods which in turn increases the cost of production, thus not allowing industries to expand as their competitive capacity is restricted.
4. Indirect Tax is unpredictable: The amount of indirect taxes collected fluctuates. It is based on the buying of goods and services. As a result, it is impossible for the government to predict how much money will be raised through indirect taxes. 

3. Difference Between Direct and Indirect Tax

The fundamental categorisation of taxes is premised upon who collects the taxes from taxpayers. An overview of direct tax and indirect tax difference is given below –

What is an SME?

It is generally accepted that an SME is something larger than those businesses that are fundamentally a vehicle for the self-employment of their owner. Equally an SME is unlikely to be listed on any stock exchange and is likely to be owned by a relatively small number of shareholders. Indeed, very often the majority of the shareholders come from one extended family. Hence the term SME covers a very wide range of businesses.

Why are SMEs important?

As we have just seen, the term SME covers a very wide range of businesses. As a result, the SME sector as a whole is very important to the economies of many countries. Estimates vary widely but within the UK, SMEs probably account for about half of employment and half of national income, and hence are of great importance.

As SMEs are relatively small they are often more flexible and quicker to innovate than larger companies. Indeed, SMEs are often thought to be better at embracing new trends and technologies. Obviously it is important to any economy that this occurs. One consequence for some successful SMEs is that they are acquired by a larger company with the financial resources to fully exploit the potential of what the SME has developed. When this happens the SME sector has provided a useful service as it has helped a larger company to innovate and continue its success into the future.

In economies, such as the UK, where manufacturing industry has declined as a proportion of total economic activity and the service sector has become increasingly important, the SME sector is likely to continue to grow. This is because, in the service sector, economies of scale are normally less important than they are in manufacturing. Hence, within the growing service sector it is easier for SMEs to survive and flourish.

Finally, it is important that SMEs can flourish as potentially a number of the SMEs of today could be the bigger companies of tomorrow.

Why do SMEs find raising finance difficult?

The directors of SMEs often complain that the lack of finance stops them growing and fully exploiting profitable investment opportunities. This gap between the finance available to SMEs and the finance that they could productively use is often known as the ‘funding or financing gap’. As advisers to SMEs it is important that we understand why this gap occurs.

The first thing to understand is that there is a limited supply of funds from investors. Once potential investors have satisfied their need and desire to spend and have paid their tax there is often little left over to be invested. An additional issue at the current time in the UK is that the returns available to investors on a typical deposit account are so low that investment does not seem attractive.

Equally there is a competitive market for the limited supply of investors’ funds. Governments and larger companies have a great appetite for the funds available and, hence, the SME sector can be squeezed out.

The SME sector tends to suffer because SMEs are viewed as a less attractive investment opportunity than many others due to the high levels of uncertainty and risk they are perceived to have. This perception of risk is due to a number of reasons including:

• SMEs often have a limited track record in raising investment and providing suitable returns to their investors
• SMEs often have non-existent or very limited internal controls
• SMEs often have few external controls. For instance they are unlikely to be abiding by the rules of any stock exchange and due to their size they are unlikely to attract much press scrutiny. Indeed, in the UK many SMEs are no longer required to have their annual accounts audited
• SMEs often have one dominant owner-manager whose decisions may face little questioning
• SMEs often have few tangible assets to offer as security.

As a result of the above, investors are nervous of investing in SMEs as they are concerned about how their funds might be used and the returns that they might get. Hence, the easiest thing for an investor is to decline any opportunity to invest in an SME, especially when there are so many other investment opportunities available to them.

Accountants can do little to alter the supply of funds or the competitive market for those funds, but can assist by showing how an SME could reduce the level of risk it is perceived to have, thereby improving its ability to raise finance. For instance, SMEs that can show that they have treated earlier investors well, have adopted some key internal controls, and have a rigorous and documented approach to decision making are more likely to be attractive to investors.

What are the potential sources of finance for SMEs?

In reality there are quite a few potential sources of finance for SMEs. However, many of them have practical problems that may limit their usefulness. Some key sources and their limitations are briefly described below. Crowdfunding and supply chain financing are then considered in more detail.

1. The SME owner, family and friends

This is potentially a very good source of finance because these investors may be willing to accept a lower return than many other investors as their motivation to invest is not purely financial. The key limitation is that, for most of us, the finance that we can raise personally, and from friends and family, is somewhat limited.

2. The business angel

A business angel is a wealthy individual willing to take the risk of investing in SMEs. One limitation is that these individuals are not common and are very often quite particular about what they are prepared to invest in. Once a business angel is interested they can become very useful to the SME, as they will often have great business acumen themselves and are likely to have many useful contacts.

3. Trade credit

SMEs, like any company, can take credit from their suppliers. However, this is only short-term and, indeed, if their suppliers are larger companies who have identified them as a potentially risky SME the ability to stretch the credit period may be limited.

Factoring and invoice discounting

Both of these sources of finance effectively let a company raise finance against the security of their outstanding receivables. Again, this finance is only short-term and is often more expensive than an overdraft. However, one of the features of these sources of finance is that, as an SME grows, their outstanding receivables will grow and so the amount they can borrow from their factor or from invoice discounting will also grow. Hence, factoring and invoice discounting are two of the very limited number of finance sources which grow automatically as the business grows.

4. Leasing

Leasing assets rather than buying them is often very useful for an SME as it avoids the need to raise the capital cost. However, leasing is only really possible on tangible assets such as cars, machines, etc.

5. Bank finance

Banks may be willing to provide an overdraft of some sort and may be willing to lend in the long term where that lending can be secured on major assets such as land and buildings. However, raising medium-term finance to fund operations is often more difficult for SMEs as banks are traditionally rather conservative. This is understandable as the loss on one defaulted loan requires many good loans to recover that loss. Hence, many SMEs end up financing medium-term, and potentially longer-term assets, with short-term finance such as an overdraft. This is poor matching and very much less than ideal. This issue is often known as the ‘maturity gap’ as there is a mismatch of the maturity of the assets and liabilities within the business.

Furthermore, banks will often require personal guarantees from the owner-manager of the SME, which means the owner-manager has to risk his personal wealth in order to fund the company.

6. The venture capitalist

A venture capitalist company is very often a subsidiary of a company that has significant cash holdings that they need to invest. The venture capitalist subsidiary is a high-risk, potentially high-return part of their investment portfolio. Hence, many banks will have venture capitalist subsidiaries. In order to attract venture capital funding an SME has to have a business idea that may create the high returns the venture capitalist is seeking. Hence, for many SMEs, operating in regular business, venture capitalist financing may not be possible. Furthermore, a venture capitalist rarely wants to remain invested in the long term and, hence, any proposal to them must show how they will be able to ‘exit’ or release their value after a number of years. This is often done by selling the company to a bigger company operating in the same trade or by growing the company to such a size that a stock exchange listing is possible.

7. Listing

By achieving a listing on a stock exchange an SME would become a quoted company and, hence, raising finance would become less of an issue. However, before a listing can be considered the company must grow to such a size that a listing is feasible. Many SMEs can never hope to achieve this.

8. Supply chain financing

In supply chain financing (SCF) the finance follows the value as it moves through the supply chain. SCF is relatively new and is different to traditional working capital financing methods, such as factoring or offering settlement discounts, because it promotes collaboration between buyers and sellers in the supply chain. Traditionally there was competition as the buyer wanted to take extended credit, and the seller wanted quick payment. SCF works very well where the buyer has a better credit rating than the seller.

Technological solutions are used in order to efficiently link the buyer, the seller and the financial institution. These technological solutions effectively automate the business and financial process from initiation to completion.

SCF can bring considerable benefit and can cover more than one step in the supply chain. It is perhaps of most benefit where considerable value is constantly moving through the supply chain, such as occurs in the automotive trade. SCF is only currently used in a relatively small proportion of companies, but its use is expected to grow significantly. As with factoring and invoice discounting, this source of finance is only short term in nature.

Obviously, SCF could be of great help to SMEs that are supplying larger companies, or even the suppliers of larger companies, with a good credit rating. As the technological solutions required to make SCF work become more widespread and SCF grows, more and more SMEs are likely to benefit.

9. Crowdfunding

Crowdfunding involves funding a venture by raising finance from a large number of people (the crowd) and is very often achieved over the internet. Crowdfunding has grown rapidly and in 2013 it has been estimated that over US$5bn was raised worldwide through crowdfunding. There are now in excess of 500 crowdfunding platforms on the internet and over 400 crowdfunding campaigns are launched every day.

The internet platforms are set up and run by moderating organisations who bring together the project initiator with the idea, and those organisations and individuals who are willing to support the idea. Different platforms have different policies with regard to assessing the ideas seeking support and checking those willing to provide the finance. Hence, great care is needed when using these platforms.

Finance provided by crowdfunding may be invested in the debt or the equity of the ventures seeking the finance. Some crowdfunding is done on a ‘keep it all’ basis where any funds raised are kept by the recipient, whereas some is done on an ‘all or nothing basis’ where the recipient only receives the funds if the total required to fund the particular project is raised within a given time frame. The crowdfunding platform takes a fee, which is often a percentage of the amount raised.

A feature of crowdfunding is that it lets people search for and invest in ideas and projects that they have an interest or a belief in. Hence, these investors are sometimes willing to take bigger risks and/or accept lower returns than would be usual. A further feature is that, just as in a real crowd, there is potential for interaction within the crowd. Hence, keen supporters of a particular idea will very often encourage others to participate.

Early crowdfunding campaigns very often focused on the arts such as funding for bands and films. However, all sorts of ideas have now been funded in this way and there has been much focus on innovation and new technology.

Crowdfunding has the potential to be very beneficial to SMEs. It allows them to contact and appeal directly to investors, who may be willing to take the risk involved in funding the new technologies and innovations, which SMEs are often so good at producing.

Why and how do governments help finance SMEs?

Governments are often keen to assist as to the extent that SMEs are unable to raise finance for their profitable projects, investment opportunities are potentially lost and, hence, national wealth is lower than it could be. Additionally, governments are keen to support innovation, which is one area where SMEs often excel, and are keen to support the growth of SMEs as this boosts employment.

A number of key ways governments assist include the following:

• Providing grants.
• Providing tax breaks – for instance, tax incentives may be available to those willing to take the risk of investing in SMEs.
• Providing advice – for instance, in Scotland there is a government-funded organisation known as ‘Business Gateway’, which provides assistance to those setting up and running a business, including advice on raising finance.
• Guaranteeing loans – for instance, for a small fee from the SME, a large proportion of any loan advanced by a bank is guaranteed by the government. As this significantly reduces the risk to the bank, they are potentially more willing to lend. In the UK this is currently called the ‘Enterprise Finance Guarantee’ scheme.
• Providing equity investment – many countries have government-backed venture capital organisations that are willing to invest in the equity of SMEs. This is often done on a matching basis, where the organisation will match any equity investment raised from other sources. In the UK this is done through ‘Enterprise Capital Funds’, while in the US there is the ‘Small Business Investment Company’ programme.