Is GST Registration Necessary for Sole Proprietorship Firms?

A sole proprietorship is the most preferred choice in the unincorporated business sector in India. It is the most uncomplicated and straightforward form of business, as it is formed with only one person as its owner, giving them exclusive control over the company’s management and operations. A sole proprietorship is the best suited for small businesses with low investments, such as self-employment, freelancing, and consulting.

The sole proprietor is the individual who legally and exclusively owns and manages the proprietorship firm, and the law governing it is the Shops and Establishments Act of the state in which the sole proprietor has their fixed place of business.

Features of a Sole Proprietorship

A sole proprietorship is a small business organisation in the unstructured sector, having its own merits and demerits to consider, and is often desirable for those who intend to start a business with the lowest investment or with the immediate resources available. The features of such proprietorship concerns are listed below:

1. The sole proprietor exercises sole and absolute control and ownership over the affairs of his business.
2. Since a proprietorship is not a going concern, it does not enjoy perpetual succession. It shall end with the death of its sole owner and cease to exist thereafter.
3. It does not enjoy a separate legal status from the proprietor, as the proprietorship is not a distinct entity before the law.
4. Since it has no legal status, the liability of the sole proprietor is also unlimited. As such, he is personally liable for the loss and debt of the firm.
5. The cost of setting up a proprietorship firm is minimal, and nominal expenses are incurred for its formation.
6. Also, the cost of indirect taxation is reduced to a great extent as all the earnings of the proprietary business are computed in the personal income of the proprietor as per the Income Tax Act, 1961.

What Laws are Applicable to a Sole Proprietorship  Business Concern?

One of the ostensible facets of such a business is that it has minimal enactments of law governing and regulating it. The laws applicable to a sole proprietorship may not be limited to just one particular aspect, but a multitude of factors, depending on its location, nature, type of business, turnover, etc. Some of these may be:

1. Shops and Establishments Act of the state in which the registered place of business of the proprietorship is located.
2. Goods and Services Tax, 2017
3. Income Tax Act, 1961
4. Law relating to general and specific licenses
5. Labour laws or the Employee Regulation, such as Employee Provident Fund (EPF), Employees’ State Insurance Corporation (ESIC), etc
6. Laws applicable to the specific business activity undertaken by the proprietor

Registration of a Sole Proprietorship Business

The registration of a sole proprietorship is not a mandatory requirement under Indian law; however, it is recommended to register the business to establish an unchallenged pathway for the proprietor to venture into markets.

Does a Sole Proprietorship Need GST Registration?

The Goods and Services Tax (GST) law in India is a destination-based tax reform applicable nationwide. It has presented a unified tax system in the country by replacing the earlier Value Added Tax (VAT), excise duty, and service tax regimes. It operates under a dual system, where both the Central and State governments levy taxes on the same transaction, categorized into Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST), and Integrated Goods and Services Tax (IGST). Registration under the GST law is free of cost and can be applied for online on the official government website. A GST registration for a sole proprietorship business is based on the nature of its business activities and its annual turnover.

A sole proprietorship may be involved in either the merchandise or the service sector. The threshold limits vary by type of business form and operation.

For example, the threshold limit beyond which a business would be required to be registered:

1. In the merchandise sector, if the turnover exceeds Rupees Forty Lakh per annum
2. In the service sector, if the turnover exceeds Rupees Twenty Lakh per annum
3. Businesses set in the hilly areas or the North-Eastern regions, if the annual turnover exceeds Rupees Ten Lakh, and so on.

A GST registration for sole proprietorships is not mandatory unless they exceed the prescribed threshold limits in the same manner as above. They may acquire a registration voluntarily, but such sole proprietorships are subject to specific criteria, which, if met, would require them to register under the GST Act, 2017. A sole proprietorship would need to be registered if:

1. a sole proprietor is engaged in the interstate sale or purchase of goods and services, or
2. He wants to claim credit on the tax paid by him on inputs or
3. the turnover of his business exceeds Rupees Twenty Lakh per annum.

However, the criteria for mandatory registration of a sole proprietor’s business under GST are not limited only to the above situations. Besides those above, there may be certain other situations where a need for GST registration arises and becomes mandatory.

The registration under GST for a sole proprietorship is mandatory irrespective of the annual turnover if the nature of the business activities is as follows:

1. Inter-state goods and services – If the sole proprietor is engaged in the sales of goods or services from one state to another, then registration becomes mandatory as the business is not confined to the lines of only one particular state.
2. Casual taxpayers – Some proprietors transact occasionally through a temporary stall, set-up, or exhibition in another state where they do not have a fixed place of business. Such individuals must obtain a GST registration, even if only for a temporary period, in the state where they intend to transact.
3. Importers and exporters – For compliance with import and export policy and international trade standards, it is essential for a trader engaged in import or export to have himself registered under GST as well.
4. Tax payers under old laws – Those proprietary concerns who were required under the old regime to have a registration or are transitioning to the new GST law without exemption need to be registered under the GST Act of 2017.
5. Business under Reverse Charge Mechanism – Any business where the recipient is liable to pay GST must have a GST registration.
6. E-commerce / Aggregators – Where goods and services are traded, bought, or sold digitally, that is, on online platforms or portals, then such merchants are mandatorily required to have a GST registration.
7. Non-Resident Business – Any such business where the sole proprietor is based in a country outside India but carries out their business in the Indian territories is required to have a GST registration in India.
8. Online Information and Database Access or Retrieval (OIDAR) – When a sole proprietor offers, supplies, or delivers their services electronically or over a digital platform across states or internationally, they need to obtain a registration under GST.

Voluntary Registration Under GST

Registration under the GST law may be obtained by applying voluntarily, even if the threshold limits are not exceeded, because opting for it is always beneficial. A registered sole proprietorship can always claim input tax credit and become trustworthy on the available platforms in the market.

Benefits of Being GST Registered

Although registration is not mandatory and is based on several particulars, a GST registration can significantly enhance the operational capacity of a sole proprietorship, helping to build its image in retail markets with potential for growth and flexibility.

Let us understand how a GST-registered concern is privileged as compared to those unregistered:

1. Competitive edge: A GST-registered sole proprietorship has an added advantage over those not registered, as it is more competitive in the market. Clients, vendors, and even customers tend to find a registered business more reliable and trustworthy. This gives them an upper hand to perform better and achieve better revenues.
2. Access to government tenders: The business wing of the government offers its tenders and contracts only to those entities that are recognised under the GST law. Being registered increases the chances of the proprietor working with government organisations.
3. Simplified and uninterrupted compliance: Maintaining records and registers becomes easier and more convenient when a proprietary concern is GST-registered, providing transparency and integrity in their dealings. This reduces the tax burden and simplifies compliance by lowering the likelihood of errors in the tax filing process.
4. Input Tax Credit: The capacity to claim an input tax credit (ITC) is what every unincorporated business owner wishes for, and GST registration grants it to the sole proprietor. By claiming credit for the GST paid on procuring inputs or other business expenses, the proprietor can minimise his costs and ultimately reduce the overall tax burden.
5. E-commerce participation: Selling on e-commerce websites is impossible without a GST registration, and therefore, to access and explore these digital marketplaces, registration is a must.
6. Interstate business opportunities: A sole proprietor who registers his business under GST has the freedom to supply or render goods or services from one state to another, tapping into new markets and business prospects.
7. Lawfulness and trustworthiness: When a proprietorship concern obtains a GST registration, the business of the sole proprietor gains a certain legitimacy in the minds of the parties dealing with it. Large enterprises, in particular, favour co-operating with clients or parties or even traders who are GST compliant, since it provides them with a sense of reliability and truthfulness in transacting with them.

Summary

In summary, since sole proprietorship firms are the cheapest forms of business organisation, their GST registrations are also free of cost. Obtaining such registration will help reduce tax costs, build trust, and unlock additional growth opportunities. It helps manage legal and tax compliance by providing both financial and operational advantages, thereby boosting growth and enhancing decision-making capabilities.

Sole owners who opt to register their businesses under GST law can achieve better efficiency, enhance customer satisfaction, and improve business and market relations, possibly opening new vistas like government contracts or e-commerce. Therefore, in total, GST registration is a crucial instrument for sustained entrepreneurial success.

Bibliography

1. www.gst.gov.in
2. www.msme.gov.in
3. www.irs.gov
4. www.startupindia.gov.in