GST – net gains for self-employed individuals and professionals

Much has been said about the increase in taxation levels on services – from a service tax regime of 15% (Including the Krishi Kalyan cess and Swachh Bharat cess) to an 18% flat rate on most financial services as per the GST notifications. Financial products like term insurance, auto insurance, insurance on home loans, consumer durables etc. will see a clear 3% increase, since these are all termed as risk premiums, i.e. the entire premium is taken to mitigate the risk of damage/theft/default. The impact on other financial products like Equity Mutual Funds is less pronounced as the tax only impacts the management fee charges, which range between 1.5-2.5% of the fund contribution. Therefore, the total impact here is in the range of 0.03%, with the fees changing from 2.65% to 2.68%.

While salaried individuals have no exit from the increase in charges, the GST structure provides benefits for the Self-Employed Professional or Individual. As per the criteria set out under GST, businesses with a turnover of less than 20 Lakhs p.a. need not register for GST (this includes self-employed professionals and individuals), and certain services and manufacturers with a turnover of up to Rs. 50 lakhs can avail of the composite scheme, where a flat presumptive tax of 0.5-2.5% is applicable. These businesses however cannot claim any input tax credits for GST paid by them.

If a company that is registered for GST buys such products or services from an unregistered vendor, it becomes liable to pay the prevailing GST on behalf of the unregistered vendor, even if the latter is exempt. So, if a company avails the services of an architect for its office plans, and the latter is not registered for GST, the company has to pay GST of 18% on the invoice submitted by the architect, and claim it as tax credit, doubling its own paperwork. Also, the unregistered vendor cannot get tax credit for the GST paid in case of their purchases. Companies paying GST are therefore likely to recover the GST amount from the vendor or only deal with vendors who have a GST registration. Therefore, if you are a Self-Employed Individual or Professional, it is advantageous for you to get yourself registered for GST. This will allow you to collect GST from your clients. At the same time, you can claim input credit for any GST that you may have paid, i.e. you have to submit receipts of the GST you have paid, and claim the same against the GST that you have collected, thereby having to deposit only the balance with the Government. Some feel this increases the onus of reporting their earnings and expenses, making for tedious work. However, there are definite benefits of GST registration for you, making the additional effort worthwhile.

How does GST registration help the Self-Employed Individual or Professional then? Under the current Income Tax laws, you can claim all reasonable expenses for the business against your revenues, and pay Income Tax on the profits. With GST, you can now also claim the credit of the taxes you pay on the purchases you make. Therefore, any purchases for the business – mobile phones, laptops, furniture etc. on which you pay GST, qualifies as an expense and you can claim the credit against your GST payable to the Government. For example, if you are a freelance consultant, and have taken term insurance on your vehicle loan, as well as the insurance on the vehicle, you can claim the GST paid on these as input credit against the GST you billed your clients, since the vehicle is a legitimate business expense. GST paid on other services consumed by you like health insurance, home loan insurance (if you use your residence as place of business), Travel and Entertainment, mobile and internet connection, etc. – are all eligible for input credit.

Since financial services like insurance premiums and loans make up the largest proportion of services availed by the Self-Employed Individual, the GST credit from these goes a long way towards mitigating the GST liability of your business.

Therefore, the introduction of GST on financial services and products is a benefit for you, and should be supported with your own GST registration to ensure you avail the best benefits from the new tax structure.